Updated Long-Term Projections for Social Security
The Congressional Budget Office (CBO) regularly prepares long-term projections of the future paths of revenues and outlays for the Social Security program.1 This latest report presents projections for the 75-year period from 2008 through 2082. (All years referred to in this report are calendar years.) The projections differ somewhat from earlier results because of newly available programmatic and economic data, updated assumptions about future demographic and economic trends, and improvements in CBO’s models. Such long-term projections are necessarily uncertain; nevertheless, the general conclusions presented here hold true under a wide range of assumptions.
Today, Social Security’s revenues each year are greater than its outlays, but as the baby-boom generation (people born between 1946 and 1964) continues to age, growth in the number of Social Security beneficiaries will accelerate, and outlays will grow substantially faster than revenues. CBO projects that outlays will first exceed revenues in 2019 and that the Social Security trust funds will be exhausted in 2049.2 If the law remains unchanged, the Social Security Administration (SSA) will then no longer have the legal authority to pay full benefits.
In this analysis, CBO presents its projections of future Social Security benefits under two scenarios.3 In the "payable benefits" scenario, outlays include only those benefits that SSA will have the legal authority to pay under current law. That scenario incorporates the assumption that once the Social Security trust funds are exhausted, SSA will reduce all benefits by a percentage that varies each year, so that the program’s total outlays equal its total available revenues. CBO assumes that such a reduction will apply to all benefits—those paid to both existing and new beneficiaries. In the other scenario, termed the "scheduled benefits" scenario, outlays include the full benefits as calculated under current law, regardless of the amounts available in the trust funds.
CBO’s projections indicate that future Social Security beneficiaries will receive larger benefits in retirement—and will have paid higher payroll taxes—than current beneficiaries do, even after adjustments have been made for inflation and even if the scheduled payments are reduced because the trust funds are exhausted. However, CBO estimates that under both scenarios, those benefits will represent a smaller percentage of beneficiaries’ preretirement earnings than is the case now.
The Finances of the Social Security Program
The Social Security system is currently running an annual surplus. In 2007, the program’s total outlays (benefits and administrative costs) measured relative to the size of the economy equaled 4.3 percent of gross domestic product (GDP), whereas the program’s dedicated revenues equaled 4.9 percent of GDP. (Dedicated revenues comprise Social Security payroll taxes and the portion of income taxes on benefits that is credited to the Social Security trust funds. Such revenues exclude interest credited to the funds.)
As the baby boomers retire, the number of Social Security beneficiaries will grow considerably, and absent legislative changes, spending for the program will climb to nearly 6 percent of GDP in 2035, CBO projects. Spending will decline slightly over the following 20 years, to about 5.6 percent of GDP, as an increasing number of baby boomers die. However, demographers generally expect life expectancy to continue to increase, and scheduled Social Security outlays are projected to resume their upward trajectory after 2055, reaching 5.8 percent of GDP in 2082.
The amount of dedicated revenues credited to the Social Security trust funds, however, is likely to shrink somewhat as a share of GDP, from 4.9 percent of GDP today to 4.7 percent in 2082. Social Security benefits are funded primarily through payroll taxes, with a small portion of revenues derived from income taxes on the benefits of higher-income beneficiaries. CBO projects that although total earnings will remain a nearly constant share of GDP, taxable earnings will decline as a share of GDP because a growing share of compensation will be paid in the form of nontaxable health benefits. Thus, in the absence of changes to the program, revenues from payroll taxes will decline as a share of GDP over the 75-year projection period, falling from 4.8 percent in 2008 to 4.2 percent in 2082.
In contrast, revenues credited to the Social Security trust funds from taxes on benefits are projected to grow in the coming decades. Under current law, receipts from income taxes will increase as a share of the economy because existing reductions in income tax rates expire, more taxpayers become subject to the alternative minimum tax, and taxpayers move into higher tax brackets because of economic growth.4 As a result, under current law, the revenues credited to the Social Security trust funds from taxes on benefits are also projected to increase, from 0.1 percent of GDP today to 0.5 percent in 2082. (For projections under an alternative assumption about future revenues from income taxes on benefits, see Box 1.) Nevertheless, total revenues credited to the trust funds are projected to decline slightly as a percentage of GDP.
Comparing Revenues from Income Taxes on Benefits Under Two Long-Term Fiscal Scenarios
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In The Long-Term Budget Outlook, published in December 2007, the Congressional Budget Office (CBO) developed its long-term projections of the Social Security program’s finances under two scenarios that incorporated different assumptions about future income tax receipts. The first was the so-called extended-baseline scenario, which extends CBO’s current-law baseline concept and is the basis for the projections in this update. (CBO’s 10-year baseline is a benchmark for measuring the budgetary effects of proposed changes in federal revenues or spending. As such, the estimates that make up the baseline largely reflect current law.)
The second scenario, an "alternative fiscal scenario," deviates from CBO’s baseline projections even during the next 10 years, incorporating some changes in policy that are widely expected to occur and that policymakers have regularly undertaken in the past. Under that scenario, none of the currently scheduled changes to tax law (for example, the expiration at the end of 2010 of the tax changes enacted in 2001 and 2003) would take effect, and the alternative minimum tax would be indexed to inflation.
CBO’s long-term projections of outlays for the Social Security program as well as the revenues the program is likely to receive from payroll taxes are identical under both the extended-baseline and the alternative fiscal scenarios. However, income tax receipts under the alternative scenario would be lower than under the extended-baseline scenario, as would revenues from income taxes on benefits. As a result, projections of Social Security finances are somewhat less favorable under the tax assumptions of the alternative fiscal scenario. Revenues from the taxation of benefits would equal 0.3 percent of GDP in 2082 rather than the 0.5 percent projected under the extended-baseline scenario, CBO estimates. In addition, under the alternative fiscal scenario, 75-year summarized revenues would be 5.0 percent of GDP or 13.9 percent of taxable payroll, instead of 5.1 percent of GDP or 14.2 percent of taxable payroll. The 75-year summarized balance (that is, the summarized deficit in the Social Security trust funds) under the alternative scenario would be -0.47 percent of GDP or -1.30 percent of taxable payroll rather than -0.38 percent of GDP or -1.06 percent of taxable payroll under the extended-baseline concept.
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Consequently, CBO projects that beginning in 2019, annual outlays for Social Security will exceed the program’s revenues (see Figure 1).5 Even if spending for the program ends up being lower and revenues higher than expected, a gap between the program’s income and outgo is likely to remain for the indefinite future.6
Potential Ranges of Social Security Outlays and Revenues as a Percentage of GDP Under the Scheduled Benefits Scenario, 1985 to 2082
Source: Congressional Budget Office.
Notes: The dark lines indicate CBO’s projections of expected outcomes. Shaded areas indicate the 80 percent range of uncertainty around each projection based on a distribution of 500 simulations from CBO’s long-term model. (An 80 percent range means that there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range.)
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
CBO projects that under current law, outlays will begin to exceed revenues in 2019 and that starting in 2049, scheduled benefits cannot be paid in full.
a. Includes scheduled benefits and administrative costs.
b. Includes payroll taxes and revenues from the taxation of benefits.
That gap will ultimately eliminate the balances in the trust funds and make it impossible, under current law, to pay the full amount of scheduled benefits. Payable benefits will equal scheduled benefits until the trust funds are exhausted (see Figure 2); thereafter, they will equal the Social Security program’s revenues. In 2049—CBO’s projected date for the trust funds’ exhaustion—revenues will equal only 84 percent of scheduled outlays. Thus, payable benefits will be 16 percent lower than scheduled benefits. Beginning in about 2070, the gap between scheduled and payable benefits will begin to grow, and by 2082, CBO projects, payable benefits will be 19 percent less than scheduled benefits.
Social Security Outlays as a Percentage of Gross Domestic Product Under the Scheduled Benefits and Payable Benefits Scenarios, 1985 to 2082
Source: Congressional Budget Office.
Note: In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
The Uncertainty of Projections of Social Security’s Finances
Many of the factors that will affect Social Security’s long-term finances are subject to significant uncertainty, and a full exposition of projected finances includes both the expected outcomes and the inherent uncertainty surrounding such estimates. CBO therefore calculated ranges of possible outcomes associated with its projections for the program. To do that, it used standard statistical techniques to analyze patterns of past variation in most of the demographic and economic factors that underlie the analysis—for example, fertility and mortality rates, interest rates, and the rate of growth of productivity. CBO then ran 500 simulations, each time randomly changing the assumed values for those factors to reflect the historical variations. Individually, the simulations have little meaning, but together, they compose a distribution of possible outcomes.7
For this analysis, CBO displays those distributions of outcomes with an 80 percent range of uncertainty—that is, by CBO’s estimate, there is an 80 percent chance that the actual value will fall within that range. For example, although CBO projects that Social Security outlays will equal about 5.8 percent of GDP in 2032, its uncertainty analysis indicates a 10 percent chance that outlays will be less than 5.0 percent of GDP in that year and a 10 percent chance that they will exceed 6.8 percent of GDP (see Table 1). In any case, outlays are virtually certain to be notably higher than their current share of 4.3 percent of GDP.
Social Security Revenues and Outlays as a Percentage of Gross Domestic Product in Selected Years Under the Scheduled Benefits Scenario
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Source: Congressional Budget Office.
Notes: Revenues include payroll taxes and income taxes on benefits as a share of GDP in the specified year, and outlays equal scheduled benefits and administrative costs.
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
a. The range within which there is an 80 percent probability that the actual value will fall (that is, the range between the 10th and 90th percentiles for each measure based on a distribution of 500 simulations from CBO’s long-term model). Balances (surpluses or deficits) do not equal the difference between the outlays and revenues displayed because each value is drawn from a different simulation.
Summarized Outlays and Revenues
Long-term projections of annual outlays and revenues present the overall magnitude and timing of the budgetary effects of the Social Security program under current law. To present the results more succinctly, analysts frequently summarize the program’s scheduled outlays and revenues in a single number for a given period (for example, total outlays over 75 years).
Summarizing outlays or revenues by taking a simple average of projected annual values would be misleading because it would not take into account the fact that, even after adjustments for inflation, a dollar today is more valuable than a dollar in the future. CBO thus summarizes the data by computing the present value of outlays or revenues for a given period and dividing that figure by the present value of the stream of GDP (or taxable payroll) over that same period.8 In calculating the summarized measures, CBO makes two other adjustments as well. First, it adds the current trust fund balance to summarized revenues to reflect Social Security=s financial history (incorporating the net effect of the program’s past annual surpluses and deficits). Second, it adds an additional year’s worth of projected outlays to summarized outlays to reflect the goal of having a "cushion" in the trust funds at the end of the period being considered.
In CBO’s projections, Social Security’s 75-year summarized outlays under the scheduled benefits scenario come to 5.45 percent of GDP, and summarized revenues equal 5.07 percent, resulting in a summarized deficit of 0.38 percent of GDP—or, when calculated as a share of taxable payroll, 1.06 percent (see Table 2). In other words, CBO projects that if payroll tax rates were increased immediately and permanently by 1.06 percentage points—from the current rate of 12.40 percent to 13.46 percent—then at the end of 2082, the trust fund balance would equal projected outlays for 2083.
Summarized Social Security Revenues, Outlays, and Surpluses or Deficits for Selected Periods Under the Scheduled Benefits Scenario
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Source: Congressional Budget Office.
Notes: Summarized revenues are the present value of annual revenues over the relevant period plus the trust fund balance at the beginning of the period divided by the present value of GDP or taxable payroll over that period. Summarized outlays are the present value of annual outlays, plus an adjustment to cover one more year of outlays at the end of the projection period, divided by the present value of GDP or taxable payroll over the period. The summarized balance (surplus or deficit) is the present value of revenues minus the present value of outlays, divided by the present value of GDP or taxable payroll over the period.
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
a. The range within which there is an 80 percent probability that the actual value will fall (that is, the range between the 10th and 90th percentiles for each measure based on a distribution of 500 simulations from CBO’s long-term model). Balances (surpluses or deficits) do not equal the difference between the outlays and revenues displayed because each value is drawn from a different simulation.
The 75-year summarized balance, however, may be much greater or smaller than -0.38 percent of GDP. In CBO’s estimation, there is a 10 percent chance of a deficit of more than 0.9 percent of GDP and also about a 10 percent chance that the 75-year summarized balance will be positive—that is, a surplus.
For another perspective on Social Security’s finances, CBO estimated the probability that total outlays would exceed total revenues by a given amount in a particular year (see Table 3). The likelihood that outlays will exceed revenues in 2030 is about 97 percent, CBO projects, and there is almost a 50 percent chance that the gap will be larger than 1 percentage point of GDP; the chance of its being 2 percentage points (or more) of GDP is only 6 percent. The probability that outlays will exceed revenues is slightly lower after 2035, following the deaths of the baby boomers, but it still remains in the vicinity of 90 percent. The probability of a gap of 2 percentage points or more grows in later years, however, reaching almost 25 percent by 2080.
Probability That Social Security Outlays Will Exceed Revenues by Specified Percentages in Selected Years Under the Scheduled Benefits Scenario
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Source: Congressional Budget Office.
Notes: Revenues include payroll taxes and income taxes on benefits as a share of GDP in the specified year, and outlays equal scheduled
benefits and administrative costs.
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
Another common measure of Social Security’s finances is the ratio of the balance in the Social Security trust funds to the program’s annual outlays. That calculation indicates how many years’ worth of benefits could be financed by a given balance.
The trust fund ratio for 2008—the balance in the Social Security trust funds at the beginning of the year divided by projected outlays for the program for that year—equals 3.6, according to CBO’s estimates. The ratio is projected to peak at 4.1 in 2016 and then decline quickly (see Figure 3).
Potential Range of the Social Security Trust Fund Ratio Under the Scheduled Benefits Scenario, 1985 to 2082
Source: Congressional Budget Office.
Notes: The trust fund ratio is the ratio of the total balance in the Social Security trust funds (the Old-Age and Survivors Insurance and the Disability Insurance Trust Funds) at the beginning of a calendar year to total Social Security outlays during that year.
The dark line indicates CBO’s projection of expected outcomes; the shaded area indicates the 80 percent range of uncertainty around the projection based on a distribution of 500 simulations from CBO’s long-term model. (An 80 percent range means that there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range.)
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
CBO has projected that 2049 is the year in which the balance in the trust funds, and thus the trust fund ratio, will fall to zero. But, as shown in Figure 3, there is a 10 percent chance that the trust funds will be exhausted in 2034 or earlier and a greater than 10 percent chance that they will not be exhausted before 2082. The negative balances shown in Figure 3 for 2050 and beyond represent CBO’s estimates of the cumulative amount of scheduled benefits that cannot be paid out of the program’s current-law revenues. (The negative balances could also be interpreted as the amount that the program would need to borrow to pay scheduled benefits, but the Social Security program does not have the legal authority to borrow money.)
Another way to consider the data that underlie Figure 3 is to examine the probability that the trust funds will be exhausted by a given year (see Figure 4). By CBO’s estimates, there is an 11 percent chance of the funds’ being exhausted before 2035, a 54 percent chance of exhaustion by 2050, and an 86 percent chance of exhaustion by 2082.
Probability That the Social Security Trust Funds Will Have Been Exhausted, by Year, 2008 to 2082
Source: Congressional Budget Office.
Note: The Social Security trust funds are the Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
The Distribution of Social Security Taxes and Benefits
Grouping Social Security participants by age or by other characteristics and examining how taxes and benefits are distributed among those groups can illuminate the program’s effects on people and the economy. CBO used several measures to present the Social Security payroll taxes paid and benefits received by people in different age and income categories, grouping individuals by their 10-year birth cohort—for example, people born in the 1940s— and by the quintile (fifth) of their lifetime household earnings. (The top fifth of earners, for instance, makes up the highest earnings quintile.) Those measures include the initial annual benefit received, the ratio of that benefit to average lifetime earnings, the lifetime benefits received, and the lifetime taxes paid. CBO presents benefits net of the income taxes that higher-income beneficiaries pay on benefits and that are credited to the Social Security trust funds.
CBO’s analysis indicates that, in general, future Social Security beneficiaries are likely to receive higher real first-year annual benefits than today’s beneficiaries, even under the payable benefits scenario. Furthermore, each birth cohort is projected to receive higher real benefits than the preceding one.
The initial annual benefit that a retired worker (a beneficiary aged 62 or older who receives benefits on the basis of his or her own work history) receives calculated in real (inflation-adjusted) dollars is a measure of his or her purchasing power.9 The initial benefit amount depends in part on when an individual decides to claim benefits—the later the age, the greater the annual benefit. Thus, any changes over time in the age at which most people first claim benefits will result in changes in average initial benefits. To ensure that the data are comparable over time, CBO in this analysis considered a hypothetical benefit amount: the median benefit that a worker would receive if everyone claimed benefits at age 65.
The initial annual benefit that a worker is scheduled to receive depends on the formula used to compute benefit levels, which is specified by law, and on his or her history of earnings. The growth of average earnings will generally cause average scheduled first-year benefits to rise over time (see Figure 5 and Table 4). However, under current law, the growth of first-year benefits will be partially offset by the scheduled increase in the normal retirement age, which is gradually rising from 65 for people born in 1937 and earlier to 67 for those born after 1959. That increase is effectively equivalent to a reduction in benefits, regardless of the age at which benefits are claimed. Payable benefits are projected to fall by 16 percent in the year that the trust funds are exhausted but then to resume their upward path (from that lower point) as earnings grow.
Median First-Year Social Security Retirement Benefits Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: First-year benefits are projected by assuming that all workers claim benefits at age 65. Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
Social Security Benefits Received by Retired Workers Under the Scheduled and Payable Benefits Scenarios, by Birth Cohort, Lifetime Earnings Level, and Sex
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Source: Congressional Budget Office.
Notes: In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
First-year benefits and replacement rates are computed for all individuals who are eligible to claim Old-Age Insurance benefits at age 62 and who have not yet claimed any other benefit. All workers are assumed to have claimed benefits at age 65. All values are net of income taxes paid on benefits and credited to the Social Security trust funds.
The median values for the categories of all workers, all female workers, and all male workers differ from the median values in the respective middle quintiles because individuals are sorted into quintiles on the basis of household earnings rather than benefits.
a. First-year benefits as a percentage of average career earnings.
b. The present value of all retired-worker benefits received. To calculate their present value, benefits have been adjusted for inflation (to produce constant dollars) and discounted to age 60. Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
The trends for first-year benefits for disabled workers (disabled beneficiaries who receive benefits on the basis of their work histories) are similar to those discussed above. However, the scheduled increase in the normal retirement age will have no direct effect on those benefits. CBO thus projects that real first-year disability benefits will increase steadily over time under both scenarios (see Figure 6 and Table 5).
Median First-Year Social Security Disability Benefits Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
Social Security Benefits Received by Disabled Workers Under the Scheduled and Payable Benefits Scenarios, by Birth Cohort and Age of Onset of Disability
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Source: Congressional Budget Office.
Notes: In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
First-year annual benefits and replacement rates are computed for all individuals who are eligible to claim Disability Insurance benefits. All values are net of income taxes paid on benefits and credited to the Social Security trust funds.
a. First-year benefits as a percentage of average career earnings.
b. The present value of all disability benefits received and retired-worker benefits received after the normal retirement age (the age at which a worker becomes eligible for full retirement benefits). To calculate their present value, benefits have been adjusted for inflation (to produce constant dollars) and discounted to age 60. Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
First-Year Replacement Rates
The replacement rate—the ratio of first-year benefits to average career earnings—provides a different perspective on the benefits that various groups of retired-worker beneficiaries receive.10 The scheduled increase in the normal retirement age will lower the replacement rate for future beneficiaries (no matter when they claim benefits) compared with the rate for people who are claiming benefits now. If Social Security benefits are paid as scheduled, the median replacement rate for beneficiaries born in the 1990s will be slightly less than the rate for beneficiaries born in the 1940s, CBO estimates (see Table 4). For individuals in the lowest earnings quintile, the replacement rates for the 1990s birth cohort will be higher than for individuals born in the 1940s, but the reverse will occur for those in the highest earnings quintile, CBO projects. Under the payable benefits scenario, the replacement rate will drop noticeably at all earnings levels for cohorts that receive benefits after the trust funds are exhausted (see Figure 7).
Median Replacement Rates for Retired-Worker Social Security Beneficiaries Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: Replacement rates are first-year benefits as a percentage of average career earnings. (First-year benefits are calculated net of income taxes paid on benefits and credited to the Social Security trust funds—that is, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds.)
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
The progressive nature of Social Security’s benefit formula means that replacement rates are higher for workers who have lower earnings. And because disabled workers tend to have lower earnings than retired workers have, replacement rates for disabled workers tend to be higher than those for retired workers (see Table 5 and Figure 8).11
Median Replacement Rates for Disabled-Worker Social Security Beneficiaries Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: Replacement rates are first-year benefits as a percentage of average career earnings. (First-year benefits are calculated net of income taxes paid on benefits and credited to the Social Security trust funds—that is, the Old-Age and Survivors Insurance and Disability Insurance Trust Funds.)
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
Another way to measure the income that retired-worker beneficiaries receive from Social Security is to look at lifetime retirement benefits—that is, the present value of all benefits that a worker gets from the program. By CBO’s estimate, it is likely that benefits received by each birth cohort will be greater, on average, than those received by the preceding cohort even under the payable benefits scenario. The trend in median lifetime retirement benefits (shown in Figure 9) differs from the trend in median first-year benefits (shown in Figure 5), for two reasons. First, as life expectancy increases, beneficiaries will collect benefits for longer periods, and scheduled lifetime benefits will grow faster than scheduled first-year benefits. Second, cohorts that begin receiving benefits before the trust funds are exhausted will collect the full amount of their scheduled first-year benefits. However, some cohorts will still be receiving benefits when the trust funds become exhausted, and as a result, their payable lifetime benefits will be lower than their scheduled lifetime benefits (see Table 4).
Median Lifetime Social Security Retirement Benefits Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: To calculate their present value, lifetime retirement benefits have been adjusted for inflation (to produce constant dollars) and discounted to age 60. Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
The present value of the median lifetime benefits paid to disabled-worker beneficiaries, including the retirement benefits they receive after reaching the normal retirement age, is much greater than the present value of lifetime benefits paid to retired-worker beneficiaries. Disabled workers receive larger lifetime benefits than do retired workers because they tend to receive benefits longer and because those benefits are paid earlier in their lifetime, which increases the benefits’ present value (see Figure 10 and Table 5). As with retirement benefits, projected lifetime disability benefits are greater for each birth cohort than for the preceding one.
Median Lifetime Social Security Disability Benefits Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort
Source: Congressional Budget Office.
Notes: Lifetime benefits include disability benefits and retirement benefits paid to disabled workers who have reached the normal retirement age designated by law. To calculate their present value, benefits have been adjusted for inflation (to produce constant dollars) and discounted to age 60. Values are net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds).
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
Lifetime Payroll Taxes and Lifetime Benefits for Workers, Dependents, and Survivors
The three measures discussed above cover only benefits for retired- and disabled-worker beneficiaries. A more comprehensive perspective comes from considering the present value of the total amount of Social Security payroll taxes paid over a lifetime and the present value of the total amount of Social Security benefits—payments to retired and disabled workers as well as to dependents and survivors—received over a lifetime. (Measures of taxes comprise all Social Security payroll taxes levied on individual earnings—both the employer’s and employee’s shares.) CBO has estimated ranges of uncertainty (specifically, the range within which 80 percent of the possible values are likely to fall) for lifetime measures of taxes and benefits to reflect the inherent uncertainty in the demographic and economic assumptions that CBO used for its projections (see the later discussion).
CBO projected measures of lifetime payroll taxes, lifetime benefits, and the ratio of lifetime benefits to taxes by 10-year birth cohort:
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Figure 11 shows the 80 percent range of uncertainty for the projected lifetime payroll taxes that individuals within a particular birth cohort will pay under the scheduled benefits scenario. Projected increases in real taxable earnings result in proportional increases in lifetime payroll tax levels. In dollar terms, the uncertainty is greatest for workers in the highest quintile of lifetime earners. However, when the range of uncertainty for lifetime taxes paid is measured as a percentage of median lifetime taxes paid for each quintile and cohort, the range is approximately equal across quintiles. |
Potential Range of Lifetime Social Security Payroll Taxes Under the Scheduled Benefits Scenario, by Birth Cohort and Lifetime Earnings
Source: Congressional Budget Office.
Notes: Taxes comprise both the employer’s and employee’s share of Social Security payroll taxes. To calculate their present value, amounts have been adjusted for inflation (to produce constant dollars) and discounted to age 60.
In the scheduled benefits scenario, workers each year receive full benefits as calculated under current law.
Shaded areas indicate the 80 percent range of uncertainty around each projection based on a distribution of 500 simulations from CBO’s long-term model. (An 80 percent range means that there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range.)
The distribution of lifetime household earners comprises only those who live to at least age 45. The distribution is divided into fifths, or quintiles, for presentation.
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Figure 12 presents equivalent projections for average lifetime benefits, which comprise all benefits received by individuals within a birth cohort (including retired-worker, disabled-worker, dependent, and survivor benefits) minus the income taxes paid on those benefits and credited to the Social Security trust funds. Results are shown under the scenarios for both scheduled and payable benefits. |
Potential Range of Lifetime Social Security Benefits Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort and Lifetime Earnings
Source: Congressional Budget Office.
Notes: Benefits comprise Social Security benefits (including retired-worker, disabled-worker, spousal, and survivor benefits) net of income taxes paid on benefits and credited to the Social Security trust funds (the Old-Age and Survivors Insurance and Disability Insurance Trust Funds). To calculate their present value, amounts have been adjusted for inflation (to produce constant dollars) and discounted to age 60.
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
The areas encompassed by the solid and dotted lines indicate the 80 percent range of uncertainty around each projection based on a distribution of 500 simulations from CBO’s long-term model. (An 80 percent range means that there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range.)
The distribution of lifetime household earners comprises only those who live to at least age 45. The distribution is divided into fifths, or quintiles, for presentation.
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Figure 13 presents the ratio of those two measures: the present value of total net benefits received over a lifetime divided by the present value of total Social Security payroll taxes paid over a lifetime. (For example, a benefit-to-tax ratio of 150 percent means that benefits are 50 percent greater than taxes.) Scheduled taxes are not sufficient to pay for full scheduled benefits, so those ratios are unrealistically high. The ratio is higher for those in the lowest earnings quintiles and lower for those with higher earnings, in part because the Social Security benefit formula is progressive and in part because those with low household earnings are more likely to receive disability or dependent benefits, or both. |
Potential Range of the Ratio of Lifetime Social Security Benefits to Lifetime Taxes Under the Scheduled Benefits and Payable Benefits Scenarios, by Birth Cohort and Lifetime Earnings
Source: Congressional Budget Office.
Notes: Benefits comprise Social Security benefits net of income taxes (as shown in Figure 11); taxes comprise the employer’s and employee’s shares of Social Security payroll taxes (as shown in Figure 12).
In the scheduled benefits scenario, workers receive full benefits as calculated under current law. In the payable benefits scenario, workers receive full benefits until the trust funds are exhausted. Then benefits are subjected to an across-the-board cut each year so that total projected benefits equal projected revenues.
The areas encompassed by the solid and dotted lines indicate the 80 percent range of uncertainty around each projection based on a distribution of 500 simulations from CBO’s long-term model. (An 80 percent range means that there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range.)
The distribution of lifetime household earners comprises only those who live to at least age 45. The distribution is divided into fifths, or quintiles, for presentation.
The uncertainty regarding future benefits can be presented in a different way as well—by showing the likelihood that a cohort will receive a specified percentage of scheduled benefits (see Table 6). According to CBO’s projections, the 1940s cohort, for example, is virtually certain to receive all of its scheduled first-year benefit. The 1990s cohort, under the payable benefits scenario, has only a 32 percent chance of receiving all of its scheduled first-year benefit but an 84 percent chance of receiving at least 70 percent of that benefit.
Probability That the Social Security Trust Funds Will Be Sufficient to Pay Specified Percentages of Scheduled Benefits, by Birth Cohort
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Source: Congressional Budget Office.
The trust funds’ exhaustion may occur after a group has begun collecting benefits, so the odds of collecting a given percentage of first-year benefits are generally higher than the odds of collecting the same proportion of lifetime benefits. For example, although the 1940s cohort has a 100 percent chance of collecting virtually all of its first-year benefits, under the payable benefits scenario it has an 89 percent chance of receiving all of its scheduled lifetime benefits. Still, the cohort has a 99 percent chance of receiving at least 95 percent of its scheduled benefits. The 1990s cohort, in contrast, has only a 13 percent chance of receiving all of its scheduled lifetime benefits under the payable benefits scenario and a 55 percent chance of receiving at least 85 percent of them.
Assumptions Used in CBO’s Analysis
A number of basic assumptions underlie all long-term projections of the Social Security program’s finances.12 To project overall trends in demographics and disability, CBO adopts the assumptions of the Social Security trustees—specifically, for this analysis, the assumptions in the 2008 trustees’ report on the aggregate fertility rate, the rate of decline in mortality, the level of immigration, and the rates of disability incidence and termination. CBO’s long-term economic assumptions are based on the assumptions used in its baseline budget projections. Thus, for the first 10 years of the 2008–2082 projection period, CBO used assumptions based on the values of the variables in its February 2008 economic forecast.13 The assumptions for later years are based on the baseline’s underlying economic assumptions for 2018. (CBO used no specific assumptions about the growth of GDP or taxable payroll but instead computed projected levels of those variables on the basis of more basic economic and demographic assumptions.)
The two most important economic variables for Social Security projections are the rate of growth of earnings and the rate of interest on the U.S. Treasury bonds credited to the trust funds. CBO projects that real earnings will grow at an average annual rate of 1.4 percent over the projection period, an estimate based on four underlying assumptions:
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Growth of Labor Productivity. CBO assumed that over the long term, total factor productivity (average real output per unit of combined labor and capital "services") would grow at a rate of 1.3 percent annually. It then used an economic model to compute the resulting growth in labor productivity (measured as growth in output per hour worked), which is projected to average 1.9 percent annually. |
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Changes in the Ratio of Taxable Earnings to Total Compensation. CBO assumed that the share of compensation that workers receive as nontaxable health benefits would continue to increase during the 2008–2082 projection period, which would reduce the average rate of growth of taxable earnings. Specifically, CBO assumed that the long-term annual rate of decline in earnings as a share of compensation would slow from about -0.25 percent to about -0.05 percent in 2082, for an average -0.13 percent, a pace that would reduce the projected growth of real wages by the same amount. |
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Difference Between Growth in the Consumer Price Index and the GDP Deflator. The consumer price index (CPI) and the GDP deflator are two different measures of inflation. The GDP deflator is used for computing measures of total economic growth and therefore the growth of the taxable wage base. However, Social Security benefits are adjusted yearly for inflation by the growth in the CPI for urban wage earners and clerical workers (CPI-W). As a result, when the GDP deflator grows more slowly than the CPI-W, the growth of real earnings is reduced. CBO assumes that the gap, and thus the reduction in real earnings growth, will average 0.3 percentage points. |
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Growth in Average Hours of Work. CBO assumed that, in general, the number of hours worked by people in the labor force would remain constant. However, different segments of the population work, on average, different numbers of hours. (For example, men tend to work more hours than women, and people in their 30s tend to work more hours than people in their 50s.) As a result, projections of total average hours worked varied slightly because of projected changes in the composition of the labor force. |
CBO assumed that the real rate of interest on the bonds credited to the Social Security trust funds would be 3.0 percent a year, a figure that it also used for the discount rate in its present-value calculations. In addition, CBO assumed that annual inflation—as measured by growth in the CPI-W—would be 2.2 percent and that the unemployment rate would be 4.8 percent.
CBO first released long-term Social Security projections in The Outlook for Social Security (June 2004). It published updated projections in March 2005 and June 2006 and in December 2007, as part of The Long-Term Budget Outlook. Those projections will now be updated annually. Appendix A reviews the changes in CBO’s projections since the end of 2007, and Appendix B presents the differences between CBO’s current projections and the 2008 projections of the Social Security trustees (formally, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds).
The Social Security trust funds (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) serve mainly as an accounting mechanism to track revenues and outlays for Social Security. The trust funds’ balance summarizes the cumulative accounting history of the Social Security program in a single number, because the balance equals the present value of all past revenues minus the present value of all past outlays. The funds’ balance also represents the total amount that the government is legally authorized to spend on Social Security. See Congressional Budget Office, Federal Debt and the Commitments of Federal Trust Funds, Issue Brief (October 24, 2002; revised May 6, 2003).
Those scenarios are distinct from the extended-baseline scenario and the alternative fiscal scenario presented in The Long-Term Budget Outlook. In this report, the assumptions embodied in the payable benefits and scheduled benefits scenarios are consistent with those underlying the extended-baseline scenario, which adheres closely to current law.
For details, see Chapter 5, "The Long-Term Outlook for Revenues," in Congressional Budget Office, The Long-Term Budget Outlook (December 2007).
The data underlying all figures as well as other related projections are available in a supplementary data file on CBO’s Web site.
CBO generally presents outlays and revenues relative to GDP, but another common practice is to show them relative to taxable payroll. Those projections are presented in Table W-2 of the supplementary data file.
CBO’s analysis includes effects of the uncertainty of a number of assumptions about future economic and demographic trends. Uncertainty about fertility rates and productivity growth causes the most variation in long-term Social Security projections. For more details, see Congressional Budget Office, Quantifying Uncertainty in the Analysis of Long-Term Social Security Projections (November 2005), especially pages 29 and 34.
The present value is a single number that expresses a flow of current and future income (or payments) in terms of an equivalent lump sum received (or paid) today. The present value depends on the rate of interest used (the discount rate). For example, if $100 is invested on January 1 at an annual interest rate of 5 percent, it will grow to $105 by January 1 of the next year. Hence, at an annual 5 percent interest rate, the present value of $105 payable a year from today is $100.
At the end of each year, the Social Security Administration adjusts benefits by the amount of any increase in the consumer price index, so in real terms, an individual’s benefit remains constant.
In such calculations, "average career earnings" refers to the average of a retired worker’s highest 35 years of covered earnings as indexed to compensate for past inflation and for real growth in average earnings nationwide. (Covered earnings may be greater than the earnings that are subject to the Social Security payroll tax because covered earnings include those above the maximum taxable amount.)
For disabled-worker beneficiaries, average career earnings are calculated not over 35 years but over the same number of years that is used in calculating benefits. For example, in the case of a worker who became disabled at age 50, average earnings would be calculated over the highest 23 years of earnings.
For a more detailed explanation of these assumptions, see Congressional Budget Office, The Outlook for Social Security, Chapter 3.
See Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2009 (March 2008).
