CBO's Long-Term Projections for Social Security: 2009 Update

August 7, 2009

Today, CBO released anupdate of its long-term Social Security projections.The projections are qualitatively similar to those in previous CBO reports: Social Securitys annual revenues currently exceed its annual outlays, but as the baby-boom generation continues to age, growth in the number of Social Security beneficiaries will pick up, and absent legislative changes, outlays will increase much faster than revenues.

Total outlays (benefits plus administrative costs) equaled 4.4 percent of gross domestic product (GDP) in 2008, whereas the programs dedicated revenuesfrom payroll taxes and from income taxes on the Social Security benefits of higherincome beneficiariesequaled 4.8 percent of GDP. In the absence of legislative changes, spending for the program will climb to 6.1 percent of GDP by 2033, CBO projects.

The current recession is resulting in lower earnings and therefore lower Social Security revenues than would otherwise have occurred, but is not having as large an effect on benefit payments. Consequently, for the next few years, Social Securitys annual surpluses will be smaller or deficits larger than they would have been if economic growth had remained steady. In the long term, the recession will have little effect on revenues and outlays as a percentage of GDP, but the trust funds balances will be permanently lower. Primarily because of the worsened short-term economic outlook, CBOs projection of the 75-year actuarial imbalance in the program is 0.5 percent of GDP, rather than the 0.4 percent we projected in 2008. As a share of taxable payroll, the projected shortfall is 1.3 percent. In other words, CBO estimates that if the Social Security payroll tax rate was increased immediately and permanently by 1.3 percentage pointsfrom the current rate of 12.4 percent to 13.7 percentthe trust funds balance at the end of 2083 would equal projected outlays for the subsequent year.

Without changes in law, CBO expects that the Social Security trust funds will be exhausted in 2043. If that point is reached, the Social Security Administration will not have the legal authority to pay full benefits and the amounts that could be paid would be about 17 percent less than those scheduled under current law.

Many of the factors that will affect Social Securitys long-term finances are subject to significant uncertainty. Thus, a full exposition of projected finances includes both the expected outcomes and the inherent uncertainty surrounding such projections. In the report, CBO presents the range of outcomes for which 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 6.1 percent of GDP in 2033, our uncertainty analysis indicates a 10 percent chance that outlays will be less than 5.4 percent of GDP in that year and a 10 percent chance that outlays will exceed 6.8 percent of GDP.

In addition to the more familiar projections of total Social Security outlays and revenues, the report includes analysis of the distribution of Social Security taxes and benefits. CBO groups individuals by their 10-year birth cohortfor example, people born in the 1940sand by the quintile of their lifetime household earnings. (The top one-fifth of earners, for instance, compose the highest earnings quintile.) CBO analyzes the first-year annual benefit received, lifetime benefits received, the ratio of that benefit to average lifetime earnings, and lifetime taxes paid. CBOs analysis indicates that, on average, future Social Security beneficiaries are likely to receive higher first-year annual benefits than todays beneficiaries (adjusted for projected inflation). Additionally, CBO projects that each birth cohort will receive greater average lifetime benefits (the present value of all benefits that a worker gets from the program) than the preceding cohort. The analysis also shows that people with lower earnings have lower average benefits than do higher earners, but those benefits replace a higher portion of the average earnings for lower earners.