Testimony on Social Security’s Finances

Social Security faces a significant financial challenge in the coming decade. The program is financed by revenues from payroll taxes and from income taxes on Social Security benefits; those revenues are credited to the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The Congressional Budget Office projects that starting in a decade, Social Security’s revenues will not be sufficient to cover all of the benefits that are due under current law.

CBO’s latest analysis of the program’s finances reached the following conclusions:

• If all benefits are paid as scheduled under current law, the balance of the OASI trust fund will decline to zero in fiscal year 2033, and the balance of the DI trust fund will do the same in 2064. If the two trust funds were combined, their balance would be exhausted in fiscal year 2034.
• The trust funds’ balances would be sufficient to pay benefits as scheduled under current law for the next 75 years if the Social Security payroll tax rate was increased immediately and permanently by 35 percent—from the current rate of 12.4 percent of taxable earnings to 16.7 percent—or if benefits were reduced by 24 percent. Alternatively, Social Security’s finances could be bolstered through a combination of changes to taxes and benefits or through transfers from the general fund of the Treasury to the trust funds.
• Long-term projections of Social Security’s finances are highly uncertain—in particular because of uncertainty about demographic and economic trends. For instance, if the economy grows more quickly than CBO projects, the trust funds’ annual revenues will 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 grows more slowly than projected, revenues will be smaller, and the necessary changes would be larger.

CBO’s 75-year projections for Social Security 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. Those demographic and economic outcomes are consistent with the ones CBO uses in its baseline projections and in its estimates and analyses.

CBO projects Social Security’s finances over the long term under two scenarios that incorporate different assumptions about the amount of benefits that would be paid after the balances of the trust funds were exhausted:

• In the scheduled-benefits scenario, people’s benefits are paid as scheduled under current law, regardless of whether the balances of the Social Security trust funds are sufficient to cover those payments.
• In the payable-benefits scenario, total benefits are limited to the amounts that can be paid from Social Security’s annual revenues once the combined balance of the trust funds is exhausted.

In the rest of this testimony, I will provide more details about CBO’s two sets of projections of Social Security’s finances and key sources of uncertainty about those projections.