Over the course of this week, we have been discussing CBO's recent Budget and Economic Outlook. On Tuesday, we summarized the report and released a paper that walked through the details. On Wednesday, we explained our Realistic Baseline and showed how it differs from CBO's current law baseline. Yesterday, we dug deeper into the economic effects of continuing current law, explaining that when it comes to deficit reduction, both timing and composition matter. Today, we're going to dig even deeper into the report.
A little-known appendix in CBO's outlooks shows the ten-year health of the major trust funds in the federal government, most notably for the Social Security program. Though the report does not project out 75 years like the Social Security Trustees report, the report shows some trouble on the ten-year horizon.
The overall Social Security spending and revenue (including general revenue to make up for the payroll tax cut) paths are shown below. As you can see, the program has been in cash-flow deficit since 2010 and will be for the foreseeable future, with the gap widening later in the projection window. By 2022, in fact, Social Security will run a deficit of nearly $170 billion -- or nearly 0.7 percent of GDP.
Aside from the cash-flow problems of the program as a whole, the Social Security Disability Insurance has a trust fund problem. It is, and has been, in deficit (even including interest) for a few years now and is projected to be exhausted in 2016 -- a year earlier than the Trustees anticipated last year. After that, according to the projections, revenue dedicated to the DI trust fund would only cover about three-quarters of benefits. Although policymakers may respond to this problem by transferring money from the OASI fund, they will have to make a decision one way or another by mid-decade.
The OASI trust fund has less of an immediate problem, but trouble is still lurking. It has been running cash deficits for the past few years, but the trust fund balance itself will continue to grow in nominal dollars through 2021 due to interest payments. Beyond that, cash deficits will begin to draw down the deficit, leading to full exhaustion some time in the mid-2030s, although CBO does not make a specific projection.
The graph below shows cash flow deficits as they have changed over three recent CBO projections.
Social Security can be viewed two ways -- as an independent self-financed program or as a part of the broader budget. As we've explained before, and the latest projections confirm:
Either of these frameworks is sensible. Ironically, though, both frameworks should lead policymakers to the same conclusion: whether for its own sake or for the country’s fiscal viability, Social Security must be reformed; and the sooner we act, the better.
P.S. Check out Jed Graham's piece on the OASDI trust fund outlook here.