Social Security, which marked its 80th anniversary in 2015, is the largest single program in the federal government’s budget. About 72 percent of the roughly 60 million people who currently receive Social Security benefits are retired workers or their spouses and children, and another 10 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The remaining 18 percent of beneficiaries are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits.
In fiscal year 2015, spending for Social Security benefits totaled $877 billion, or almost one-quarter of federal spending. OASI payments accounted for about 84 percent of those outlays, and DI payments made up about 16 percent.
Each year (most recently in June 2015), CBO publishes its long-term projections of revenues and outlays for the federal government, including those for the Social Security program. CBO’s projections generally reflect current law, following its 10-year baseline budget projections and then extending the baseline concept for the rest of the long-term projection period. This report presents additional information about CBO’s long-term projections for Social Security in the form of 15 exhibits that illustrate the program’s finances and the distribution of benefits paid to and payroll taxes collected from various groups of people. Any harm that rising debt would cause to the economy was not factored into the long-term projections published in this report. The appendix presents more information on CBO’s demographic projections. A list of definitions of common terms appears at the end of the publication.
Social Security is funded by dedicated tax revenues from two sources: payroll taxes and income taxes on benefits. Today, 96 percent of that tax revenue comes from the payroll tax—generally, 12.4 percent of people’s earnings that are subject to the Social Security tax. Workers and their employers each pay half; self-employed people pay the entire amount. Earnings up to a maximum annual amount—now $118,500—are subject to the payroll tax. The remaining share of tax revenues for the program—about 4 percent—is collected from income taxes on Social Security benefits. The tax revenues that funded the program totaled $817 billion in fiscal year 2015.
Social Security retirement and disability benefits and the program’s administrative costs are paid from two trust funds—one for the OASI program and one for the DI program. In addition to the tax revenues, the funds also receive intragovernmental interest payments on the Treasury securities they hold. In a given year, the receipts credited to a fund, including the interest credited on its balances, minus spending for benefits and administrative costs, constitute the trust fund’s surplus or deficit. Although the two trust funds are legally separate, in this report, CBO generally follows the common analytical convention of considering them as combined.
In 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 combined OASDI trust funds. A gap between those amounts has persisted since then, and in fiscal year 2015, outlays exceeded noninterest income by almost 9 percent. As more people in the baby-boom generation retire over the next 10 years, CBO projects, that gap will widen. If current laws governing taxes and spending stayed generally the same—an assumption that underlies CBO’s extended baseline projections—outlays from the Social Security program would exceed revenues by almost 30 percent in 2025 and by more than 40 percent in 2040.
According to CBO’s extended baseline projections, the DI trust fund will be exhausted in fiscal year 2021, the OASI trust fund will be exhausted in calendar year 2030, and the combined OASDI trust funds will be exhausted in calendar year 2029. If a trust fund’s balance declined to zero and current revenues were insufficient to cover benefits specified in law, the Social Security Administration would no longer be permitted to pay full benefits when they were due. In the years after a trust fund was exhausted, annual outlays would be limited to annual revenues: All receipts to the trust fund would be used, and the trust fund’s balance would remain essentially at zero.
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 benefits that are larger. Because Social Security’s benefit formula is progressive, replacement rates—annual benefits as a percentage of past earnings—are lower, on average, for workers who have had higher earnings. As another example, CBO projects that people who were born in more recent decades will pay more in taxes and receive more in benefits because they typically will earn more over a lifetime, even after an adjustment for inflation.