Testimony on Social Security’s Finances

Chairman Ferguson, Ranking Member Larson, and Members of the Subcommittee, thank you for inviting me to testify about the Social Security program.

Social Security faces a significant financial challenge in the coming decade. Its two components, Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), are financed by revenues from payroll taxes and from income taxes on Social Security benefits. But those revenues, which are credited to the components’ separate trust funds, are not sufficient to cover the benefits that are due under the program.

• In the Congressional Budget Office’s projections, the balance of the OASI trust fund reaches zero in fiscal year 2033, and the DI trust fund is exhausted in 2061. If the two trust funds were combined, they would be exhausted in fiscal year 2034.
• The trust fund balances would be sufficient to pay benefits as scheduled under current law through 2098 if payroll tax rates were increased immediately and permanently by about 4.4 percentage points or benefits were reduced by an amount equivalent to that change. A combination of changes to taxes and benefits or a transfer from the Treasury’s general fund could also be sufficient.
• Such long-term projections are uncertain. Demographic and economic factors are key sources of that uncertainty. For instance, if the economy grew more quickly than projected, the trust funds’ annual revenues would be greater, and the changes to taxes or spending that would be necessary to pay benefits as scheduled under current law through 2098 would be smaller. If, instead, the economy grew more slowly than projected, revenues would be smaller, and the necessary changes would be larger.

CBO’s long-term projections for Social Security, which provide estimates of the trust funds’ balances and of other aspects of the program over the next 75 years, are based on a detailed microsimulation model that starts with data about individuals from a representative sample of the population and simulates demographic and economic outcomes for that sample over time. CBO produces long-term projections of Social Security’s finances under two scenarios that are based on different assumptions about the amounts of benefits that would be paid after the trust funds were exhausted:

• A scheduled-benefits scenario, in which people’s benefits are paid as scheduled under current law, regardless of whether balances in the program’s trust funds are sufficient to cover those payments; and
• A payable-benefits scenario, in which total benefit amounts are limited to annual revenues from payroll taxes and income taxes on benefits after the combined trust funds are exhausted.

In this testimony, I will discuss CBO’s two sets of projections of Social Security’s finances, differences in initial benefits received (by beneficiaries’ birth cohort and lifetime earnings), and key sources of uncertainty in the agency’s projections for the program.