learn more about working at cbo and check out the agency’s career opportunities
blog post
October 22, 2010
Social Security
Social Security is the single largest federal program, with outlays of $768 billion in fiscal year 2012. The program has two parts. The Old-Age and Survivors Insurance program pays benefits to retired workers and to their dependents and survivors, and the Disability Insurance program pays benefits to disabled workers and to their spouses and survivors. Social Security benefits are financed by a payroll tax on current workers, half paid by the worker and half paid by the employer. CBO regularly examines various possible changes to Social Security outlays or receipts.
monthly archive
- May 2013 (2)
- April 2013 (14)
- March 2013 (22)
- February 2013 (10)
- January 2013 (11)
- December 2012 (4)
- November 2012 (10)
- October 2012 (4)
- September 2012 (6)
- August 2012 (5)
- July 2012 (11)
- June 2012 (8)
CBO's 2010 Long-Term Projections for Social Security: Additional Information
Highlights
Social Security is the federal government's largest single program. About 54 million people currently receive Social Security benefits. About 69 percent are retired workers, their spouses, and children and another 12 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19 percent are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits. Social Security's outlays in fiscal year 2010 totaled $706 billion, one-fifth of the federal budget; OASI payments accounted for 82 percent of those outlays and DI payments made up about 18 percent.
Social Security has two primary sources of tax revenues: payroll taxes and income taxes on benefits. In fiscal year 2010, roughly 97 percent of tax revenues dedicated to Social Security were collected from a payroll tax of 12.4 percent that is levied on earnings and split evenly by workers and their employers at 6.2 percent apiece. Self-employed workers pay the entire 12.4 percent tax on earnings themselves. The payroll tax applies only to taxable earnings—earnings up to a maximum annual amount ($106,800 in 2010). Some Social Security benefits also are subject to taxation: In fiscal year 2010, about 3 percent of Social Security's tax revenues came from the income taxes that higher-income beneficiaries paid on their Social Security benefits. Tax revenues credited to the program totaled $670 billion in that year.
Revenues from taxes, along with intragovernmental interest payments, are credited to Social Security's two trust funds—one for OASI and one for DI—and the program's benefits and administrative costs are paid from those funds. Legally, the funds are separate, but they often are described collectively as the OASDI trust funds. In a given year, the sum of receipts to a fund along with the interest that is credited on previous balances, less spending for benefits and administrative costs, constitutes that fund's surplus or deficit.
In calendar year 2010, Social Security's outlays will exceed tax revenues (that is, the trust funds' receipts excluding interest) for the first time since the enactment of the Social Security Amendments of 1983. Over the next few years, the Congressional Budget Office (CBO) projects, the program's tax revenues will be approximately equal to its outlays. However, as more of the baby-boom generation (that is, people born between 1946 and 1964) enters retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. Starting in 2016, CBO projects, outlays as scheduled under current law will regularly exceed tax revenues.
CBO projects that the DI trust fund will be exhausted in fiscal year 2018 and that the OASI trust fund will be exhausted in 2042. Once a trust fund's balance has fallen to zero and current revenues are insufficient to cover the benefits that are specified in law, a program will be unable to pay full benefits without changes in law. The DI trust fund came close to exhaustion in 1994, but that outcome was prevented by legislation that redirected revenue from the OASI trust fund to the DI trust fund. In part because of that experience, it is a common analytical convention to consider the DI and OASI trust funds as combined. CBO projects that, if legislation to shift resources from the OASI trust fund to the DI trust fund was enacted, the combined OASDI trust funds would be exhausted in 2039.
The amount of Social Security taxes paid by various groups of people differs, as do the benefits that different groups receive. For example, people with higher earnings pay more in Social Security payroll taxes than do lower-earning participants, and they also receive larger benefits (although not proportionately larger). Because of the progressive nature of Social Security's benefit formula, replacement rates—the amount of annual benefits as a percentage of annual lifetime earnings—are lower, on average, for workers who have had higher earnings. As another example, the amount of taxes paid and benefits received will be greater for people in later birth cohorts because they typically will have higher earnings over a lifetime, even after adjusting for inflation, CBO projects. However, replacement rates will be slightly lower, on average, for people in later birth groups because their full retirement age (the age at which they can receive unreduced retirement benefits) will be higher.
About This Analysis
CBO regularly prepares long-term projections of revenues and outlays for the Social Security program. The most recent projections, for the 75 years from 2010 through 2084, were published in Chapter 3 of The Long-Term Budget Outlook (June 2010, revised August 2010). This publication presents additional information about those projections.
The budget projections published in The Long-Term Budget Outlook involved two scenarios: The first, CBO's extended-baseline scenario, adheres closely to current law. For example, that scenario reflects the assumption that the tax cuts enacted in 2001 and 2003 expire as scheduled at the end of 2010. CBO also has developed an alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. Unless otherwise noted, the projections presented in this analysis are based on the assumptions of the extended-baseline scenario. In that scenario, income taxes, including the income taxes on Social Security benefits that are credited to the trust funds, are higher than they are in the alternative fiscal scenario.
Scheduled and Payable Benefits
CBO prepared two types of benefit projections. Benefits as calculated under the Social Security Act, regardless of the balances in the trust funds, are called scheduled benefits. The Social Security Administration has no legal authority to pay scheduled benefits if their amounts exceed the balances in the trust funds, however. Therefore, if the trust funds became exhausted, payments to current and new beneficiaries would need to be reduced to make the outlays from the funds equal the revenues flowing into the funds. Benefits thus reduced are called payable benefits. In such a case, all receipts to the trust funds would be used and the trust fund balances would remain essentially at zero. When presenting projections of Social Security's finances, CBO generally focuses on scheduled benefits because, by definition, the system would be fully financed if only payable benefits are disbursed.
Quantifying Uncertainty
To quantify the amount of uncertainty in its Social Security projections, CBO created a distribution of outcomes from 500 simulations using its long-term model. In those simulations, the assumed values for most of the key demographic and economic factors that underlie the analysis—for example, fertility and mortality rates, interest rates, and the rate of growth of productivity—were varied on the basis of historical patterns of variation. Several of the exhibits in this publication show the simulations' 80 percent range of uncertainty: That is, in 80 percent of the 500 simulations, the value in question fell within the range shown; in 10 percent of the simulations, the values were above that range; and in 10 percent they were below. Long-term projections are necessarily uncertain, and that uncertainty is illustrated in this publication; nevertheless, the general conclusions of this analysis hold true under a variety of assumptions.
System Finances
The first part of this publication (Exhibits 1 through 8) examines Social Security's financial status from several vantage points. The fullest perspective is provided by projected streams of annual revenues and outlays. A more succinct analysis is given by measures that summarize the annual streams in a single number. The system's finances are also described by projecting what is called the trust fund ratio, the amount in the trust funds at the beginning of a year in proportion to the outlays in that year.
The Distribution of Benefits
In the second part (Exhibits 9 through 16), CBO examines the program's effects on people by grouping Social Security participants by various characteristics and presenting the average taxes and benefits for those groups. In its analysis, CBO divided people into groups by the decade in which they were born and by the quintile of their lifetime household earnings. For example, one 10-year cohort consists of people born in the 1940s, and the top fifth of earners constitutes the highest earnings quintile. CBO's modeling approach produces estimates for individuals; household status is used only to place people into earnings groups.
In this part of the analysis, benefits are calculated net of income taxes paid on benefits by higher-income recipients and credited to the Social Security trust funds. Median values are estimated for each group: Estimates for half of the people in the group are lower and estimates for half are higher.
Most retired and disabled workers receive Social Security benefits on the basis of their own work history. This publication first presents measures of those benefits that do not include benefits received by dependents or survivors who are entitled on the basis of another person's work history. Then, for a more comprehensive perspective on the distribution of Social Security benefits, this analysis presents measures of the total amount of Social Security payroll taxes that each participant pays over his or her lifetime as well as the total Social Security benefits—including payments received as a worker's dependent or survivors—that each receives over a lifetime.
Changes in CBO's Long-Term Social Security Projections Since 2009
The shortfalls for Social Security that CBO is currently projecting are larger than the shortfalls projected in CBO's Long-Term Projections for Social Security: 2009 Update (August 2009). The 75-year imbalance has increased from 1.3 percent to 1.6 percent of taxable payroll under the extended-baseline scenario and from 1.5 percent to 2.1 percent of taxable payroll under the alternative fiscal scenario. Those differences are attributable to changes both in projected outlays and in projected revenues. The 75-year cost rate—a measure of outlays—is about 2 percent higher under both scenarios because of near-term economic weakness, slightly lower projections of real (inflation-adjusted) growth in wages, and technical changes in modeling methods. The projected 75-year income rate—a measure of Social Security's revenues—is slightly higher than CBO estimated in 2009 under the extended-baseline scenario because income taxes on benefits are projected to be higher as a share of benefits. However, the income rate is about 1 percent lower than in 2009 under the alternative fiscal scenario because income taxes on benefits are projected to equal a smaller share of benefits.
Related CBO Analyses
Further information about Social Security and CBO's projections is available in other CBO publications:
- Various approaches to changing the program are presented in Social Security Policy Options (July 2010).
- The current long-term projections are consistent with the 10-year baseline CBO published in A Preliminary Analysis of the President's Budgetary Proposals for Fiscal Year 2011 (March 2010). (Data in that report and in The Long-Term Budget Outlook are generally presented for fiscal years; this analysis and Social Security Policy Options use calendar-year data.)
- The current projections update those in CBO's Long-Term Projections for Social Security: 2009 Update. Differences in the two sets of projections are the result of newly available programmatic and economic data, updated assumptions about future economic trends, and improvements in models. This current set of projections also incorporates the effects of the health care legislation passed in March 2010.
- The methodology used to develop the projections in this publication is described in CBO's Long-Term Model: An Overview, a background paper published in June 2009.
- Appendix B of The Long-Term Budget Outlook offers an explanation of the values used for the demographic and economic variables underlying the projections. (As was the case for CBO's 2009 projections, the projections in this publication are based on the demographic assumptions of the 2009 report of the Social Security trustees.)
- Numerous other aspects of the program are addressed in various publications available from CBO's Web site.
monthly archive
- May 2013 (2)
- April 2013 (14)
- March 2013 (22)
- February 2013 (10)
- January 2013 (11)
- December 2012 (4)
- November 2012 (10)
- October 2012 (4)
- September 2012 (6)
- August 2012 (5)
- July 2012 (11)
- June 2012 (8)
Social Security Disability Insurance: Participation Trends and Their Fiscal Implications
Highlights
The Social Security Disability Insurance (DI) program pays cash benefits to nonelderly adults (those younger than age 66) who are judged to be unable to perform substantial work because of a disability but who have worked in the past; the program also pays benefits to some of those adults dependents. In 2009, the Disability Insurance program paid benefits to almost 8 million disabled beneficiaries and about 2 million of those beneficiaries spouses and children.
Between 1970 and 2009, the number of people receiving DI benefits more than tripled, from 2.7 million to 9.7 million (unless otherwise specified, all years are calendar years). That jump, which significantly outpaced the increase in the working-age population during that period, is attributable to several changesin characteristics of that population, in federal policy, and in opportunities for employment. In addition, during those years, the average inflation-adjusted cost per person receiving DI benefits rose from about $6,900 to about $12,800 (in 2010 dollars). As a result, inflation-adjusted expenditures for the DI program, including administrative costs, increased nearly sevenfold between 1970 and 2009, climbing from $18 billion to $124 billion (in 2010 dollars). Most DI beneficiaries, after a two-year waiting period, are also eligible for Medicare; the cost of those benefits in fiscal year 2009 totaled about $70 billion.
Under current law, the DI program is not financially sustainable. Its expenditures are drawn from the Disability Insurance Trust Fund, which is financed primarily through a payroll tax of 1.8 percent; the fund had a balance of $204 billion at the end of 2009. The Congressional Budget Office (CBO) projects that by 2015, the number of people receiving DI benefits will increase to 11.4 million and total expenditures will climb to $147 billion (in 2010 dollars; see Figure 1). However, tax receipts credited to the DI trust fund will be about 20 percent less than those expenditures, and three years later, in 2018, the trust fund will be exhausted, according to CBOs estimates. Without legislative action to reduce the DI programs outlays, increase its dedicated federal revenues, or transfer other federal funds to it, the Social Security Administration will not have the legal authority to pay full DI benefits beyond that point.
A number of changes could be implemented to address the trust funds projected exhaustion. Some would increase revenues dedicated to the program; others would reduce outlays. One approach to reducing expenditures on DI benefits would be to establish policies that would make work a more viable option for people with disabilities. However, little evidence is available on the effectiveness of such policies, and their costs might more than offset any savings from reductions in DI benefits.
monthly archive
- May 2013 (2)
- April 2013 (14)
- March 2013 (22)
- February 2013 (10)
- January 2013 (11)
- December 2012 (4)
- November 2012 (10)
- October 2012 (4)
- September 2012 (6)
- August 2012 (5)
- July 2012 (11)
- June 2012 (8)
Abstract
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. As a result, under current law, resources dedicated to the programs will become insufficient to pay full benefits in 2039, the Congressional Budget Office (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 Social Security taxes paid and the benefits received by various groups of people. This CBO study examines a variety of approaches to changing Social Security, updating an earlier work, Menu of Social Security Options, which CBO published in May 2005. In keeping with CBO's mandate to provide objective, impartial analysis, the current study makes no recommendations.
Highlights
Social Security, the federal government's largest single program, provides benefits to retired workers (through Old-Age and Survivors Insurance, OASI), to people with disabilities (through Disability Insurance, DI) 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. 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, the Congressional Budget Office (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.
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. Interest on the balances of those funds also is credited to the funds (which often are treated collectively as the OASDI trust funds). CBO estimates that, unless changes are made to the system, the trust funds combined will be exhausted in 2039. At that point, the resources available to the Social Security program will be insufficient to pay full benefits as they are currently structured.
This CBO study first provides an overview of Social Security and discusses some criteria for evaluating proposals to change the system. It then presents a variety of options for changing the Social Security system and analyzes the financial and distributional effects of those options- that is, how they would affect Social Security's finances and how they would alter the benefits paid to people in various earnings categories and people born in various decades.
The Outlook for Social Security's Finances
As the population of the United States continues to grow older, the number of Social Security beneficiaries will continue to rise, and the program's outlays will increase faster than its revenues. Long-term projections are unavoidably uncertain but, under a broad range of assumptions, benefits that are scheduled under current law will consistently exceed revenues.
CBO projects that beginning in 2039 the Social Security Administration will not be able to pay those scheduled benefits, however. If revenues were not increased, benefits would need to be cut by about 20 percent in 2040 to equalize outlays and revenues. Those proportionately lower payments, which would be made to all Social Security recipients once the trust funds were exhausted, are known as payable benefits.
A commonly used summary measure of the system's long-term financial conditions 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. The actuarial balance is the value of Social Security's revenues over the 75-year period, discounted to their value in current dollars, plus the current balance in the OASDI trust funds, minus the present value of future Social Security outlays, minus the value of a year's worth of benefits as a reserve at the end of the period. CBO estimates the 75-year actuarial balance to be -0.6 percent of gross domestic product (GDP); that is, 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 GDP. That figure is the amount by which the Social Security payroll tax would have to be raised or scheduled benefits reduced for the system's revenues to be sufficient to cover scheduled benefits. 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.
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, scheduled outlays would exceed revenues by 1.4 percent of GDP.
Policy Options
In this study, CBO analyzes 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:
- Increases in the Social Security payroll tax,
- Reductions in people's initial benefits,
- Increases in benefits for law earners,
- Increases in the full retirement age, and
- Reductions in the cost-of-living adjustments that are applied to continuing benefits.
Each option is analyzed in isolation, although most proposals to make substantial changes to Social Security combine several provisions. Many options would interact with one another, so combining them might cause changes to the overall finances of the system that are larger or smaller than would be produced by a simple sum of the effects of several discrete options.
This list of options is far from exhaustive. It does not include changes that would draw on general government revenues, create individual accounts, or change the trust funds' investments. Other than an increase in the Social Security payroll tax, changes to federal tax policy are not considered. The options do not include any that apply only to people who receive DI benefits, although some of the options would affect OASI and DI beneficiaries alike.
Effects of the Options
This study analyzes the overall effect of each option on the finances of the Social Security system. 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 (see Summary Figure 1).
This study also analyzes 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, participants are grouped by the amount of their lifetime household earnings and by their birth cohort (that is, by the decade in which they were born). Those distributional effects of the options are measured relative to the outcomes that would result both from scheduled benefits and from payable benefits under current law.
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 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 with similar financial effects in the aggregate 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. For example, a policy that gradually reduced benefits would have a much larger effect on people whose benefits began in 2040 than it would on those whose benefits began in 2020. Raising tax rates would increase the amounts paid by younger people but make little difference in the sum of taxes paid over a lifetime by people who already have left or are about to leave the workforce.