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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