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CCH® UNEMPLOYMENT INSURANCE — 9/26/08

CBO releases its long term projections for Social Security

Recent projections by the Congressional Budget Office (CBO) indicate that future Social Security beneficiaries will receive larger benefits in retirement —and will have paid higher payroll taxes —than current beneficiaries do, even after adjustments have been made for inflation and even if the scheduled payments are reduced because the trust funds are exhausted. However, the CBO estimates that under both scenarios, those benefits will represent a smaller percentage of beneficiaries' pre-retirement earnings than is the case now.

Trust fund exhaustion predicted for 2049

The CBO projects that although total earnings will remain a nearly constant share of gross domestic product (GDP), taxable earnings will decline as a share of GDP because a growing share of compensation will be paid in the form of nontaxable health benefits. Thus, in the absence of changes to the Social Security program, revenues from payroll taxes will decline as a share of GDP over the 75-year projection period, falling from 4.8% in 2008 to 4.2% in 2082.

The CBO projects that beginning in 2019, annual outlays for Social Security will exceed the program's revenues. However, according to the most recent annual report of the trustees of the Social Security trust funds (March 2008), this scenario will occur in 2017. In 2049 —the CBO's projected date for the trust funds' exhaustion —revenues will equal only 84% of scheduled outlays. Thus, payable benefits will be 16% lower than scheduled benefits. The trustees' report, however, predicts that trust fund exhaustion will occur in 2041 and that, when it occurs, payable benefits will be 22% lower than scheduled benefits. Beginning in about 2070, the gap between scheduled and payable benefits will begin to grow, and by 2082, says the CBO, payable benefits will be 19% less than scheduled benefits (25% less according to the Social Security trustees).

In the CBO's projections, Social Security's 75-year summarized outlays under the scheduled benefits scenario come to 5.45% of GDP, and summarized revenues equal 5.07%, resulting in a summarized deficit of 0.38% of GDP —or 1.06% when calculated as a share of taxable payroll. In other words, the CBO projects that if payroll tax rates were increased immediately and permanently by 1.06% —from the current rate of 12.40% to 13.46% —then at the end of 2082, the trust fund balance would equal projected outlays for 2083. Social Security trustees, on the other hand, have calculated the actuarial deficit over the next 75 years as being 0.6% of future GDP and as 1.70% of taxable payroll.

Projection is slightly rosier than December 2007 projection

The CBO's current estimates show a smaller shortfall than its 2007 projection. A major reason for the change is a difference in the CBO's long-term projections of GDP. The CBO's new estimate of GDP over the 2008-2082 period is substantially higher than its 2007 projection, thus reducing the ratio of both revenues and outlays to GDP. The most important reason for the projection of higher GDP is the substantial alterations in the Social Security trustees' projections of immigration.

Other factors also contribute to the increase in the CBO's current projection of GDP, including an increase in the average annual rate of growth of real (inflation-adjusted) wages from 1.2% to 1.4%.

Why do CBO estimates differ from those of the Social Security trustees?

Although both the trustees' report and the CBO report are quite similar —both predict deficits over the next 75 years —the differences in exhaustion dates and in the amount of the deficit reflect different assumptions about future tax and interest rates and the pace of the growth of wages. The CBO assumes that current income tax law will remain unchanged and that, therefore, with the scheduled expiration of the tax reductions enacted in 2001 and 2003, effective income tax rates —and revenues to the Social Security trust funds from the taxation of benefits —will increase. The trustees, in contrast, assume that effective income tax rates during the 75-year projection period will be similar to current levels.

Another divergence between the two sets of assumptions is the CBO's assumed real (inflation-adjusted) interest rate of 3.0%, which is slightly higher than the trustees' assumed rate of 2.9%. In calculations of present value, the CBO's higher rate places less weight on the large deficits that occur in later years and results in smaller summarized deficits. Its projection of a faster rate of the growth of wages —1.4% rather than the trustees' 1.1% —also leads to smaller summarized deficits.

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