Differences Between CBO’s Long-Term Projections of Social Security’s Finances and Those of the Social Security Trustees

Appendix
B

Differences Between CBO’s Long-Term Projections of Social Security’s Finances and Those of the
Social Security Trustees

Each year, the Social Security trustees (in formal terms, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds) publish long-term projections for the Social Security program.¹ The trustees’ projections differ somewhat from the Congressional Budget Office’s (CBO’s), but both organizations conclude that under current law, the program’s scheduled outlays will exceed its scheduled revenues during the next 75 years and the program’s annual deficits will be large and growing over the long term. Both groups of estimators project that the program’s outlays will rise to 5.8 percent of gross domestic product (GDP) in 2082. CBO’s projection of revenues for that year is 4.7 percent of GDP; the trustees’ projection of revenues equals 4.4 percent of GDP.

On a summarized basis, CBO’s and the trustees’ estimates are quite similar. The trustees project that summarized 75-year outlays will be 5.63 percent of GDP—or 3 percent greater than CBO’s projection of 5.45 percent. The trustees’ projection of summarized 75-year revenues is 5.02 percent of GDP—1 percent lower than CBO’s projection of 5.07 percent. Yet despite the similarities, such small differences in CBO’s and the trustees’ projections of outlays and revenues can result in relatively large differences in their projections of long-term deficits. Thus, CBO estimates that the summarized 75-year shortfall will be 0.38 percent of GDP, and the trustees project that the deficit will be 0.61 percent. As a percentage of taxable payroll, those figures are equivalent to projected deficits of 1.06 percent by CBO’s calculations and 1.70 percent by the calculations of the trustees.

Those differences result in part from different assumptions about future tax and interest rates and the pace of growth of wages. CBO assumes that current income tax law will remain unchanged and that therefore, with the scheduled expiration of the tax reductions enacted in 2001 and 2003, effective income tax rates—and revenues to the Social Security trust funds from the taxation of benefits—will increase. The trustees, in contrast, assume that effective income tax rates during the 75-year projection period will be similar to current levels.

Another divergence between the two sets of assumptions is CBO’s assumed real (inflation-adjusted) interest rate of 3.0 percent, which is slightly higher than the trustees’ assumed rate of 2.9 percent. In calculations of present value, CBO’s higher rate places less weight on the large deficits that occur in later years and results in smaller summarized deficits. CBO’s projection of a faster rate of growth of wages—1.4 percent rather than the trustees’ 1.1 percent—also leads to smaller summarized deficits.

A number of small differences in modeling further distinguish CBO’s and the trustees’ projections. The result is that CBO projects somewhat smaller average benefits, even after accounting for differences between its economic assumptions and those of the trustees.

1

The latest report (Social Security Administration, The 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds) was published on March 25, 2008.