Congressional Budget Office
Director's Blog

In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.
 
Over the past few years, U.S. government debt held by the public has grown rapidly. According to CBO’s projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.

Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels, as shown in the figure below. (For more details, see CBO’s recent report The Long-Term Budget Outlook.)

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually—but a high level of federal debt, combined with an unfavorable long-term budget outlook, would also increase the probability of a sudden fiscal crisis prompted by investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. The resulting abrupt rise in interest rates would create serious challenges for the U.S. government. For example, a 4-percentage-point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion; if those higher rates persisted, net interest costs in 2015 would be nearly double the roughly $460 billion that CBO currently projects for that year. Such an increase in rates could also precipitate a broader financial crisis because it would reduce the market value of outstanding government bonds, inflicting losses on mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.

Options for responding to a fiscal crisis would be limited and unattractive. The government would need to undertake some combination of three actions. One action could be changing the terms of its existing debt. This would make it difficult and costly to borrow in the future. A second action could be adopting an inflationary monetary policy by increasing the supply of money. However, this approach would have negative consequences for both the economy and future budget deficits. A third action could be implementing an austerity program of spending cuts and tax increases. Such budgetary adjustments, in the face of a fiscal crisis, would be more drastic and painful than those that would have been necessary had the adjustments come sooner.

This brief was prepared by Jonathan Huntley of CBO’s Macroeconomic Analysis Division.
 

People born in other countries are a growing presence in the U.S. labor force. In 2009, more than 1 in 7 people in the U.S. labor force were born elsewhere; 15 years earlier, only 1 in 10 was foreign born. About 40 percent of the foreign-born labor force in 2009 was from Mexico and Central America, and more than 25 percent was from Asia.

Today CBO released an update to its November 2005 report on the role of immigrants in the U.S. labor market. That earlier report included data through 2004; this update, the first of several on various aspects of immigration, incorporates data through 2009 from the Census Bureau’s Current Population Surveys. The update includes various tables showing statistics on the number of foreign-born workers, the countries from which they have come, their educational attainment, the types of jobs they hold, and their earnings.

Some highlights include:

• People born in other countries represent a substantial and growing segment of the U.S. labor force—that is, people with a job or looking for one. In 2009, 24 million members of the labor force were foreign born, up from 21 million in 2004. However, the growth of the foreign-born labor force was much slower between 2004 and 2009 than between 1994 and 2004.
• In 2009, over half of the foreign-born workers from Mexico and Central America did not have a high school diploma or GED credential, as compared with just 6 percent of native-born workers. Yet nearly half of the foreign-born workers from places other than Mexico and Central America had at least a bachelor’s degree, as compared with 35 percent of native-born workers.
• Over time, participants in the U.S. labor force from Mexico and Central America have become more educated. In 2009, they had completed an average of 9.8 years of schooling—up from 9.5 years in 2004; 55 percent lacked a high school diploma or GED credential—down from 59 percent in 2004; and among 16- to 24-year-olds, 50 percent were not in school and were not high school graduates—down from 60 percent in 2004. Nevertheless, those born in Mexico and Central America constitute an increasingly large share of the least educated portions of the labor force.
• To a considerable extent, educational attainment determines the role of foreign-born workers in the labor market. In 2009, 70 percent of workers born in Mexico and Central America were employed in occupations that have minimal educational requirements, such as construction laborer and dishwasher; only 23 percent of native-born workers held such jobs.
• Foreign-born workers who came to the United States from places other than Mexico and Central America were employed in a much broader range of occupations. Nevertheless, they were more than twice as likely as native-born workers to be in fields such as computer and mathematical sciences, which generally require at least a college education. Their average weekly earnings were similar to those of native-born men and women.
• On average, the weekly earnings of men from Mexico and Central America who worked full time were just over half those of native-born men; women from Mexico and Central America earned about three-fifths of the average weekly earnings of native-born women.

This report was prepared by Nabeel Alsalam of CBO’s Health and Human Resources Division.

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.

This morning CBO released a letter to Chairman Fortney Pete Stark analyzing a proposal to add a “public plan” to the options available through the health insurance exchanges that will be established under the recently enacted health care legislation—the Patient Protection and Affordable Care Act, or PPACA (Public Law 111-148).
 
Under the proposal, the Department of Health and Human Services would establish and administer a public health insurance plan and would charge premiums to fully cover its costs for benefit payments and administrative expenses. The plan’s payment rates for physicians and other practitioners would be based on Medicare’s current rates but would not be subject to the future reductions required by Medicare’s sustainable growth rate formula; instead, those rates would initially increase by 5 percent and then would rise annually to reflect estimated increases in physicians’ costs. The plan would pay hospitals and other providers the same amounts that would be paid under Medicare, on average, and would establish payment rates for prescription drugs through negotiation. Health care providers would not be required to participate in the public plan in order to participate in Medicare.

CBO estimates that the public plan’s premiums would be 5 percent to 7 percent lower, on average, than the premiums of private plans offered in the exchanges. The differences between the premiums of the public plan and the average premiums of private plans would vary across the country because of geographic differences in the plans’ relative costs. Those differences in premiums would reflect the net impact of differences in the factors that affect all health insurance premiums, including the rates paid to providers, administrative costs, the degree of benefit management applied to control spending, and the characteristics of the enrollees.

CBO estimates that roughly one-third of the people obtaining coverage through the insurance exchanges would enroll in the public plan. We anticipate that, under the proposal, about 25 million people would purchase coverage individually through the exchanges on average during the 2017–19 period; in addition, about 13 million people would obtain employment-based coverage through the exchanges—so total enrollment in exchange plans would be about 38 million. Total enrollment in the public plan would thus be roughly 13 million. Given all of the factors at work, however, those estimates are subject to an unusually high degree of uncertainty. 
 
CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the proposal would reduce federal budget deficits through 2019 by about $53 billion. That estimate includes a $37 billion reduction in exchange subsidies and a $27 billion increase in tax revenues that would result because a greater share of employees’ compensation would take the form of taxable wages and salaries (rather than nontaxable health benefits). Those changes would be partly offset by an $11 billion increase in costs for providing tax credits to small employers. (The proposal would have minimal effects on other outlays and revenues related to the insurance coverage provisions of PPACA.)

The bulk of those budgetary effects would occur in the second half of the decade; the savings estimated for 2019 are about $14 billion. Although CBO and JCT have not yet extended to 2020 the models they use to estimate insurance coverage, the proposal would probably reduce the federal budget deficit by about $15 billion in that year, bringing the total budgetary savings through 2020 to about $68 billion. As discussed in CBO’s letter, those estimates are smaller than figures that have been previously reported regarding the savings from establishing a similar public plan because those previous estimates were related to legislation that differed in a number of ways from what was enacted.

The Congress created the Arsenal Support Program Initiative (ASPI) in 2001 to help maintain the functional capabilities of the Army’s three manufacturing arsenals, which are located in Rock Island, Ill., Watervliet, N.Y., and Pine Bluff, Ark. A primary goal of the program is to enable commercial firms to lease vacant space at the arsenals once it has been renovated, thereby encouraging collaboration between the Army and commercial firms as well as reducing the costs the government incurs to operate and maintain the arsenal facilities. Since the ASPI’s inception, a number of commercial tenants have leased unused property at the arsenals; however, the financial benefits generated by the program have proved to be small relative to the program’s funding.

To determine whether the ASPI is meeting certain of its objectives, the Congress directed CBO to conduct a “business case” analysis of the program. In response to that directive, today CBO released a study examining the costs, return on investment, and economic impact of the program.

The ASPI has received more than $87 million in funding from its inception in 2001 through 2010. As of the end of 2009, a total of  $54 million had been disbursed. Most of the funds have been used to renovate and improve arsenal properties and infrastructure. Funding for the ASPI is not used to pay employees who work for the office that manages the program; those costs are paid out of the Army’s operation and maintenance account

The principal outcome of the ASPI to date is that commercial tenants have begun to lease unused property at the arsenals, typically vacant buildings or portions of buildings that the Army has renovated specifically for that purpose. Tenants compensate the arsenals mostly in the form of negotiated rental payments or services in lieu of rent. As of 2009, a total of 46 tenants were leasing more than 200,000 square feet of space at the arsenals under the ASPI; payments and services provided to the government totaled $1.3 million in that year.

CBO’s analysis shows that the total stream of financial benefits that the ASPI has generated for the government so far and can be expected to generate in the future will fall short of the up-front investment required to ready the arsenal properties for tenants. In making this determination, CBO first estimated the revenues and other financial benefits that the program has generated for the government so far and those that might be generated in the future. CBO then compared the present value of those revenues and benefits to the outlays required to make space available to tenants. That calculation measures the economic value, in 2010, of projected future cash flows and noncash benefits using a discount rate that attaches a market price to the risk associated with those flows.

Under the assumptions that the ASPI receives no additional appropriations for renovations after 2010 and that the government continues to pay for marketing and administering the program, CBO estimates that, measured in 2010 dollars, the economic value of outlays for the program would total $99 million through 2075 and the economic value of the financial benefits that the program will generate for the government would total $47 million. The resulting net present value is negative $52 million, effectively translating into a government subsidy of about 50 cents for every dollar spent on the program.

In terms of the program’s broader economic impact, the ASPI positively affects the local economies in two ways: government spending for the program probably leads to additional jobs for civilians and income for area businesses; and commercial tenants who relocate to the arsenal regions because of the program buttress economic activity in the area. On a national basis, the ASPI has had little if any net economic impact, in CBO’s judgment, because the program primarily causes a shift in resources from one region of the country to another.
 
This study was prepared by Daniel Frisk of CBO’s National Security Division.

The federal government supports the use of biofuels—transportation fuel produced usually from renewable plant matter, such as corn—in the pursuit of national energy, environmental, and agricultural policy goals. Tax credits encourage the production and sale of biofuels in the United States, while federal mandates specify minimum amounts and types of biofuel usage each year through 2022. Tax credits effectively lower the private costs of producing biofuels relative to the costs of producing their substitutes, gasoline and diesel fuel. Together, the credits and mandates increase domestic supplies of energy and reduce U.S. emissions of greenhouse gases, albeit at a cost to taxpayers and consumers. For example, in fiscal year 2009, the biofuel tax credits reduced federal excise tax collections by about $6 billion below what they would have been if the credits had not been in effect.

Roughly 11 billion gallons of biofuels were produced and sold in the United States in 2009, and ethanol produced from corn accounted for nearly all of that total. Blenders of transportation fuels receive a tax credit of 45 cents for each gallon of ethanol that is combined with gasoline and sold. Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to corn farmers—in the form of higher prices received for their products.

Most of the rest of the biofuel sold in the United States consists of biodiesel, which is made largely from soybean oil but is also produced from animal fats and recycled plant oils. Until recently, the producers of such biodiesel received a tax credit of $1 per gallon. Although that credit expired in December 2009, CBO included it in the analysis to provide information about the value of the credit should policymakers decide to reinstate it. In the future, cellulosic ethanol—made from plant wastes such as corn stalks—could account for a significant share of domestic production of biofuels. Its producers are eligible for a tax credit of $1.01 per gallon if it is produced and blended with gasoline; even with that credit, however, cellulosic ethanol is not commercially viable today and is produced in very limited quantities.

In a study prepared at the request of the Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance, CBO assesses the incentives provided by the biofuel tax credits for producing different types of biofuels and analyzes whether they favor one type of biofuel over others. In addition, we estimate the cost to U.S. taxpayers of reducing the use of petroleum fuels and emissions of greenhouse gases through those tax credits; we also analyze the interaction of the credits and the biofuel mandates. CBO’s main conclusions are the following:

• The incentives that the tax credits provide to producers of biofuels differ among the fuels. After adjustments for the different energy contents of the various biofuels and the petroleum fuel used to produce them, producers of ethanol made from corn or other similar feedstocks receive 73 cents to provide an amount of biofuel with the energy equivalent to that in one gallon of gasoline. On a similar basis, producers of cellulosic ethanol receive $1.62, and producers of biodiesel would receive $1.08 (if that credit were extended).
• The costs to taxpayers of reducing consumption of petroleum fuels differ by biofuel. Such costs depend on the size of the tax credit for each fuel, the changes in federal revenues that result from the difference in the excise taxes collected on sales of gasoline and sales of biofuels, and the amount of biofuels that would have been produced if the credits had not been available. The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol and $3.00 for cellulosic ethanol. The cost of reducing an equivalent amount of diesel fuel (that is, a quantity having the same amount of energy as a gallon of gasoline) using biodiesel is $2.55, based on the tax policy in place through last year.
• Similarly, the costs to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits vary by fuel: about $750 per metric ton of CO₂e (that is, per metric ton of greenhouse gases measured in terms of an equivalent amount of carbon dioxide) for ethanol, about $275 per metric ton of CO₂e for cellulosic ethanol, and about $300 per metric ton of CO₂e for biodiesel. Those estimates do not reflect any emissions of carbon dioxide that occur when production of biofuels causes forests or grasslands to be converted to farmland for growing the fuels’ feedstocks (the raw material for making the fuel). If those emissions were taken into account, such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing emissions through the use of different biofuels—in some cases, by a substantial amount.

Federal biofuel mandates require vendors of motor fuels to produce or blend specified minimum volumes of the different fuels with gasoline and diesel fuel; the annual targets are scheduled to rise through 2022. In the past, those requirements have not directly increased the quantity of biofuels sold in the United States because the combination of underlying economic conditions and the biofuel tax credits has caused the use of biofuels to exceed the mandated quantities. In the future, the scheduled rise in mandated volumes would require the production of biofuels in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.

The report was written by Ron Gecan of CBO’s Microeconomic Studies Division and Rob Johansson, formerly of CBO.

Yesterday, CBO issued its Monthly Budget Review, which discussed the status of the federal budget through the end of June, encompassing the first nine months of fiscal year 2020.  At that point, the deficit was about $1.0 trillion, about $80 billion dollars less than the shortfall last year at this time.

Revenues were about the same as they were last year ($1.6 trillion)—reflecting increases in receipts from corporate income taxes and from the Federal Reserve's payments to the Treasury, which were largely offset by decreases in individual income and payroll taxes. Receipts from corporate income taxes were up by about $31 billion (or 31 percent), the result of both improved economic conditions and lower depreciation charges. Receipts from the Fed increased by $35 billion, primarily because the central bank has increased the amount of assets it holds and has shifted to riskier investments in support of the housing market and the broader economy. In contrast, receipts from individual income and payroll taxes declined by $57 billion (or 4 percent), mostly because nonwithheld payments reflecting 2009 tax liabilities were lower. Withheld taxes have dropped as well (by about 2 percent)—but declines during the first part of the fiscal year were followed by increases in each of the past four months (compared with receipts in the same months last year). 

Spending during the first nine months of the fiscal year was $2.6 trillion—about $70 billion (or 3 percent) less than outlays at the same point in 2009. That decline includes a net reduction of about $350 billion in major components of spending related to the recent financial crisis—the Troubled Asset Relief Program, Treasury payments to Fannie Mae and Freddie Mac, and net outlays for federal deposit insurance. Spending for all other federal activities rose by almost $280 billion (or 11 percent). Payments of unemployment benefits increased by $41 billion (or almost 50 percent) and interest on the public debt was up by about 20 percent. Outlays for Medicaid rose by 9 percent, and defense spending and payments of Social Security benefits were both 6 percent higher. Spending for food and nutrition assistance, the State Fiscal Stabilization Fund (created by the American Recovery and Reinvestment Act), student aid, and refundable tax credits also increased significantly.

The Monthly Budget Review was prepared by Elizabeth Cove Delisle and Daniel Hoople of CBO's Budget Analysis Division, and by Barbara Edwards and Joshua Shakin of our Tax Analysis 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.