The Bottom Line

August 5, 2014

The release of the Social Security Trustees Report just two weeks after CBO released its long-term outlook gives us a good opportunity to compare how the two reports differ in their projections. Overall, CBO anticipates Social Security will be in greater financial trouble than the Trustees do, forecasting an exhaustion date for the combined trust fund three years earlier in 2030 and a 75-year actuarial shortfall that is more than one-third higher. But there is more going on here than meets the eye.

Specifically, CBO projects a 75-year actuarial shortfall of 4 percent of taxable payroll compared to the Trustees' figure of 2.9 percent; as a percent of GDP, these figures are 1.4 and 1 percent, respectively.

August 4, 2014

In his blog this weekend, Paul Krugman suggested the cost of waiting to address our mounting national debt is relatively minor. He asks “why, exactly, is [cutting future entitlement costs] something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.”

August 1, 2014

The Social Security Trustees Report showed a largely similar outlook compared to the report last year, though it was slightly worse. Trust fund exhaustion dates were similar other than the date for the separate Old-Age and Survivors' Insurance (OASI) fund, which was brought forward one year to 2034. In addition, the 75-year actuarial shortfall increased slightly from 2.72 percent of taxable payroll to 2.88 percent, largely the result of changes in economic assumptions and shifting the 75-year period over one year.

As a percent of payroll, the change is entirely concentrated on the spending side, but this appears to be more a factor of payroll shrinking than nominal dollar spending increasing. Social Security revenue is the same at 13.9 percent of payroll over the 75-year period, while spending is 0.2 percentage points higher than last year at 16.8 percent.

Looking back further, as we noted in our analysis of the report, the outlook for the program has deteriorated in each of the last four reports. Below, we show the assets in the trust fund over time as projected in the 2010, 2012, and 2014 Trustees reports.

While the change in Social Security projections this year is relatively small, there are some interesting sources for those changes, some of which may have implications for future changes in Trustees forecasts.

Same-Sex Marriage

July 31, 2014

The recent CBO Long-Term Budget Outlook confirmed that our long-term debt problems remain far from solved, with debt projected to exceed the size of the economy within 25 years. Federal spending, especially the mandatory portion of the budget, will continue to outpace revenue collected, running up debt and interest payments on that debt. Spending on Social Security and health care programs will grow by almost half from 9.8 percent of GDP today to 14.3 percent of GDP by 2039. Two factors are reponsible for major portions of the increase in mandatory spending: an aging population and "excess cost growth," when health care costs are growing faster than the rest of the economy.

July 31, 2014

On Tuesday, the Committee for a Responsible Federal Budget hosted an event titled "Decoding the Social Security Trustees Report" to discuss the Trustees' latest update on Social Security's finances and policy options to reform the program. The event featured Social Security Chief Actuary Stephen Goss, Reps. Tom Cole (R-OK) and John Delaney (D-MD), and a panel discussion moderated by Damian Paletta of The Wall Street Journal.

July 31, 2014
CRFB President Signs Letter in Support

In late May, Representatives Tom Cole (R-OK) and John Delaney (D-MD) introduced the Social Security Commission Act of 2014, reflecting a bipartisan effort to extend the solvency of the Social Security program and make it more sustainable over the long term. On Monday, July 28, Committee for a Responsible Federal Budget President Maya MacGuineas joined Jim Kessler of Third Way, Andrew Biggs of the American Enterprise Institute, and Robert D. Atkinson of the Information Technology and Innovation Foundation in signing a letter in support of the bill.

According to the recent Social Security Trustees Report, the growing gap between spending and revenue will lead to trust fund exhaustion in the next 20 years. At that point, all beneficiaries will see a 23 percent cut in benefits if Congress does not act. The letter touched on this looming insolvency:

There is widespread recognition across the political spectrum that Social Security, on its current path, will be unable to pay full benefits to disabled beneficiaries in 2016 and to retired and survivors of American workers in 2034 (2033 under a combined Trust Funds scenario). For many American families, these would be catastrophic events.

July 30, 2014

Note: CBO has issued a more detailed score of the bill. The table has been updated to reflect these numbers.

July 30, 2014

Last night, the Senate passed legislation extending highway funding through December and offsetting the cost with a number of deficit reduction measures. The Senate approach, which is based on an amendment from Senators Tom Carper (D-DE), Bob Corker (R-TN), and Barbara Boxer (D-CA), is far more responsible than the House bill, which relies in large part on a gimmick called pension smoothing. As CRFB President Maya MacGuineas explained in a press release:

What we really need is a long-term highway funding solution, but in the meantime, the least we can do is responsibly pay for temporary bailouts of the Highway Trust Fund. There is no question that the Senate bill is the more responsible of the two highway bills.

Unfortunately, it turns out that the Senate bill's savings fall $2.4 billion short of the general revenue transfer, according to a new CBO score. This deficit is mostly the result of a drafting error which causes its customs fees to raise $2 billion less than intended. The House has rightly objected to this shortfall and also expressed concern with some of the revenue-related provisions in the Senate legislation. Fortunately, the House has the power to correct this error, modify this bill, and work with the Senate to pass a responsible highway funding bill.

Score of Senate-Passed Highway Bill
Policy Ten-Year Savings/Costs (-)
Extension of customs fees $1 billion*
Increased mortgage reporting requirements $2.1 billion
Clarification of 6-year statute of limitations for overstatement of basis $1.3 billion
100% levy on payments to Medicare providers with delinquent tax payments $0.8 billion
Other provisions -$0.5 billion
Transfer from LUST trust fund $1 billion
Total Offsets $5.7 billion
Total Transfer $8.1 billion
July 30, 2014

We have already released our analysis of the 2014 Social Security Trustees' report, which showed that the program's long-term finances are largely similar but slightly worse than projected last year. Now it's time to turn to the Medicare report, which showed some improvement in the finances of the Hospital Insurance (HI) trust fund for Part A (which covers inpatient hospital and post-acute care) and lower Medicare spending on an apples-to-apples basis. However, the improvement in the Medicare outlook does not mean that the program is out of the woods. Even with assumptions that the Trustees question as too optimistic, the report forecasts a significant rise in Medicare spending, and the HI trust fund is projected to be insolvent in 16 years.

Hospital Insurance Trust Fund Solvency

The Trustees now foresee the HI trust fund being exhausted in 2030, four years later than they predicted last year, at which point payments from the trust fund would be cut by about 15 percent. The 75-year actuarial shortfall narrowed by one-quarter of a percentage point, from 1.11 percent of taxable payroll to 0.87 percent. These revisions are similar to those of Congressional Budget Office (CBO) earlier this month.

As a percent of GDP, Part A spending will rise from 1.5 percent this year to 2.1 percent by 2035 and 2.4 percent by 2070. Meanwhile, revenue will rise more slowly from 1.45 percent this year to 1.7 percent by 2035 and 1.8 percent by 2070. The HI fund is projected to run surpluses from 2015-2020, which would be the first time since 2004. However, deficits will quickly return and rise to 0.5 percent of GDP by the late 2030s, stabilizing at that level after.

July 29, 2014

Eugene Steuerle is the cofounder of the Tax Policy Center, a senior fellow at The Urban Institute, a columnist for Tax Notes Magazine, and a CRFB Board member. This morning, he testified before the House Ways and Means subcommittee on Social Security. Below is a transcript of his spoken remarks, as posted on his blog.

July 29, 2014

With the release of the Social Security Trustees Report, CRFB held an event examining the trustees report on July 29, 2014, at the Hyatt Regency in Washington, DC. Video of the event is below.

July 28, 2014

This afternoon, Chairman Bernie Sanders (I-VT) and Chairman Jeff Miller (R-FL) announced compromise legislation to address the serious problems at the Department of Veterans Affairs. The authors said that the legislation would fund private health care for certain veterans, provide for hiring of additional health care providers by the VA, and make other changes in the VA health care system with a reported net cost of $12 billion.

July 28, 2014

The Social Security and Medicare Trustees reports provide a detailed projection of each program's finances over the next 75 years. In response, we have condensed the 250-page Social Security report into a concise, 6-page analysis.

July 28, 2014

Today, the Social Security and Medicare Trustees released reports on the financial state of the country's largest entitlement programs.

July 28, 2014

The American Enterprise Institute held an event Thursdsay commemorating the 50th anniversary of the start of the War on Poverty. The event, “Expanding Opportunity in America,” featured House Budget Committee Chairman Paul Ryan (R-WI) as well as a panel of experts.

July 25, 2014

This week, the Senate agreed by unanimous consent to consider the House-passed highway bill, H.R. 5021. The agreement allows for the consideration of several amendments, including an amendment by Senators Tom Carper (D-DE), Bob Corker (R-TN), and Barbara Boxer (D-CA), that would remove the pension smoothing offset, a gimmick that we have written about previously.

As outlined in the table below, the Carper-Corker-Boxer amendment would replace the offsets in the House bill with the measures approved by the Senate Finance Committee, excluding pension smoothing. This funding would be sufficient to keep the HTF solvent through December 20.

Short-Term Proposals to Fund Highways
Policy H.R. 5021 (passed by House)
Senate Finance
Carper-Corker-Boxer Amendment
Enact pension smoothing $6.4 billion $2.7 billion  -
Extend customs fees by 1 year to 2024 $3.5 billion $2.9 billion  $0.9 billion*
Increase mortgage reporting - $2.1 billion  $2.1 billion
Clarify of statute of limitations on overstatement of basis - $1.3 billion  $1.3 billion
Withhold payments from Medicare providers with delinquent taxes - $0.8 billion  $0.8 billion
Transfer funds from the Leaking Underground Storage Tank Fund $1 billion
$1 billion $1 billion
Rescind old transportation earmarks - <$0.1 billion  -
Add due diligence requirement for tax preparers regarding the Child Tax Credit - <$0.1 billion <$0.1 billion
Other provisions - <$0.1 billion <$0.1 billion
Total Revenue Raised
$10.9 billion $11 billion $5.7 billion*
Percent Raised From Pension Smoothing Gimmick ~60% ~25% 0%
Date of Highway Trust Fund Exhaustion May 2015 May 2015 December 2014*
July 25, 2014

In a recent New York Times column, economist Paul Krugman argued that the focus on the national debt represented “an imaginary budget and debt crisis.” He stated that current debt increases are manageable, there is little danger of a debt crisis, and it would be “no big deal” economically to stabilize the debt-to-GDP ratio. He contends that those who focus on impending deficits are fear mongering and diverting the national attention "from its real problems — crippling unemployment, deteriorating infrastructure and more."

We find several flaws in Krugman’s budgetary logic, detailed below.

Claim: The Long-Term Outlook is "distinctly non-alarming"

In his column, Krugman argues that the latest Congressional Budget Office (CBO) projections are "distinctly non-alarming" except to those engaging in scare tactics. We think Doug Elmendorf – Director of CBO – would disagree. In his recent testimony before the House Budget Committee, he warned that the debt projections could have "significant negative consequences," that further debt increases "could be especially harmful," and that the budget is on an "unsustainable current path."

July 24, 2014

In its release this week of the economic effects of the President's budget, CBO found it would increase the size of the economy, mainly due to immigration reform. As a result, under the President's budget Gross National Product (GNP) would be about 2.1 percent higher in 2024 than before the enactment of the budget, though GNP per capita would be about 1 percent lower. Importantly, higher economic growth would lead to additional revenue collection and lower deficits. Because CBO accounted for certain economic effects of immigration in its analysis of the President's budget, the additional economic effects would actually increase the deficit by less than $100 billion over ten years.

In analyzing the economic impact of the President's budget, CBO finds six main ways in which the budget would affect economic growth:

  • Increasing the size of the U.S. population, thus raising the number of workers;
  • Increasing federal budget deficits in the short term, mainly through higher government spending, which would boost aggregate demand and the use of labor and capital;
  • Reducing federal budget deficits in the long term, which would increase national saving and private investment;
  • Raising the marginal tax rate on labor income, thereby discouraging work;
  • Raising the marginal tax rate on capital income, thereby discouraging saving; and
  • Increasing federal investment in ways that would increase productivity and the skill level of the workforce.
July 23, 2014
Think Tanks on Left, Right, and Center Agree

In the coming days, the Senate will vote on the House-passed measure to replenish the Highway Trust Fund. The bill is a last-ditch effort to prevent the fund from going bankrupt, which would stall construction projects across the country.

July 23, 2014

Although most of our analysis of CBO's Long-Term Budget Outlook has focused on debt projections, CBO also makes projections about the solvency of trust funds over the long term. And, unfortunately, it finds that most major trust funds will become insolvent in the not-too-distant future.

CBO has already projected the impending disruption of construction projects due to the Highway Trust Fund depletion later this year, the 20 percent across-the-board benefit cut facing Social Security Disability beneficiaries sometime in FY 2017, and the need to address the Pension Benefit Guaranty Corporation's Multiemployer Pension fund by 2021. In this report, it finds that the the combined Social Security trust funds (assuming the SSDI program borrows from the Old-Age trust fund) and the Medicare Hospital Insurance (HI) trust fund will both run out of money around 2030. In other words, CBO projects that all the major trust funds will be depleted just over fifteen years from now. And, at that point, significant automatic benefit/payment cuts would take place.

As we touched on before, Social Security's projected finances are worse than last year, a product of lower payroll tax revenue and lower interest rates. On the other hand, the HI insolvency date has been moved back about five years due to CBO's continued downward revisions to Medicare spending. Still, these changes give a 15-year clock for both the Social Security trust fund and the HI trust fund. These trust funds would experience a sizeable cut in spending (benefits) to bring outlays in line with revenue when the trust funds are exhausted.

Exhaustion Dates for Major Trust Funds
Trust Fund
Exhaustion Date
Percent Cut Required
Highway Trust Fund FY 2015 28%
Social Security Disability Insurance FY 2017 20%
PBGC Multiemployer Fund FY 2021 87%
Medicare Hospital Insurance ~2030 ~15%
Social Security Old-Age and Survivors Insurance 2032 ~30%
Social Security Combined 2030 ~27%

 Source: CBO, CRFB calculations

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