August 5, 2011
CBO projects that in fiscal year 2011, outlays for Social Security will total $733 billion, one-fifth of the federal budget. About 56 million people will receive Social Security benefits this year. Most are retired workers, their spouses, their children, or their survivors, who receive payments through Old-Age and Survivors Insurance (OASI). The remainder consist of disabled workers or their spouses and children, who receive Disability Insurance (DI) benefits.
Tax revenues credited to the program will total $687 billion in fiscal year 2011, almost all from payroll taxes. A very small portion (about 3 percent) comes from income taxes on benefits. 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.
Today CBO released additional information about the long-term projections of the Social Security program’s finances that were included in CBO’s 2011 Long-Term Budget Outlook (June 2011). Today’s publication, shown below, updates the projections included in CBO’s 2010 Long-Term Projections for Social Security: Additional Information. As we reported in June 2011, the shortfalls for Social Security that CBO is currently projecting are marginally smaller than those projected in our October 2010 publication.
In conjunction with this publication, CBO released—for the first time—an infographic on Social Security. This graphic is meant to provide a handy summary of some of the most pertinent information about Social Security, including historical statistics and projections of the program’s financial status, the number of workers per beneficiary, the distribution of recipients, and the program’s share of federal noninterest spending. The infographic also describes how benefits are calculated, shows how the benefit formula affects different workers, and provides a timeline of the key policy changes to the Social Security program.
The publication’s first group of exhibits—Exhibits 1 through 8—examines Social Security’s financial status from several vantage points. In calendar year 2010, for the first time since the enactment of the Social Security Amendments of 1983, annual outlays for the program exceeded annual revenues excluding interest credited to the trust funds. CBO projects that the gap will continue, finding that:
- Over the next five years, outlays will be about 5 percent greater than such revenues. However, as more members of the baby-boom generation enter retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. As a result, the shortfall will begin to grow around 2017.
- The DI trust fund will be exhausted in 2017 and the OASI trust fund will be exhausted in 2040, CBO projects. It is a common analytical convention to consider the DI and OASI trust funds in combination. CBO projects that, if legislation to shift resources from the OASI trust fund to the DI trust fund was enacted, as has been done in the past, the combined trust funds would be exhausted in 2038. However, because of the uncertainty surrounding the various factors that affect the program’s revenues and outlays, that date could vary quite a bit.
- 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 1.6 percent of taxable payroll. In other words, to bring the program into balance over the next 75 years, payroll taxes would have to be increased immediately from 12.4 percent to about 14.0 percent and kept at that higher rate, or the benefits specified in law would have to be reduced immediately by about 10 percent, or some combination of those changes and others would have to be implemented.
Distribution of Benefits
As shown in subsequent charts beginning with Exhibit 9, 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. Because of the progressive nature of Social Security’s benefit formula, replacement rates—the amount of annual benefits as a percentage of average annual lifetime earnings—are lower, on average, for workers who have had higher earnings.
- 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 later birth groups because their full retirement age (the age at which they can receive unreduced retirement benefits) will be higher.
In many of the exhibits throughout the publication, we present a distribution of possible outcomes to quantify the amount of uncertainty in our Social Security projections. Those distributions were based on 500 simulations in which most of the key demographic and economic factors in the analysis vary according to historical patterns. For example, we examined the percentage of simulations in which the trust funds are exhausted by a specific year. In 42 percent of CBO’s simulations, the funds are exhausted by 2035. In 84 percent of the simulations, the trust funds are exhausted by 2050. In 97 percent of the simulations, the trust funds are exhausted by 2085.
Additional information on the Social Security program can be found in the following CBO publications:
- Various approaches to changing the program are presented in Social Security Policy Options (July 2010);
- The methodology used to develop the projections is described in CBO’s Long-Term Model: An Overview, a background paper published in June 2009.
The analysis was prepared by Noah Meyerson, Charles Pineles-Mark, Jonathan Schwabish, Michael Simpson, and Julie Topoleski of CBO’s Long-Term Modeling Group under the leadership of Joyce Manchester.