Social Security Policy Options

July 1, 2010

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.