Social Security

Trust Fund Insolvency Dates Are Approaching Fast

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

CBO: Social Security Trust Fund To Be Exhausted 1 Year Earlier, in 2030

One of the biggest stories of last year's long-term outlook was the deterioration in Social Security's financial picture. Largely due to CBO's expectation that people will live longer, its estimate of the 75-year shortfall grew by more than half from their 2012 outlook – from 2.1 percent of taxable payroll to 3.4 percent (1.2 percent of GDP). CBO predicted that the combined Social Security trust funds would run out of money by 2031, two years earlier than predicted by the Trustees. This year's projections show a further deterioration in Social Security's financial situation, with the 75-year shortfall now projected at 4.0 percent of payroll (1.4 percent of GDP) and the trust fund expected to be exhausted by 2030. The Disability Insurance trust fund faces a more immediate issue, with its exhaustion date set for FY 2017.

This year's change is not due to demographics – which look similar to last year – but two broader economic factors: lower interest rates and slower short-term economic growth. CBO has revised its estimate of long-term interest rates down by about 0.5 percentage points. Lower interest rates mean lower debt payments and are actually good for the budget overall but cause estimates to place a greater weight on later years when Social Security is running greater deficits. Thus, the higher weight placed on later years worsens the actuarial balance (and creates a lower return to the assets in the Trust Fund) and is responsible for about half of the change.

The second major change is from changes in ten-year projections since last September, mostly from the February 2014 outlook when CBO revised down its economic growth projections. The resulting forecast had less income tax and payroll tax revenue, which contributed to the worsening Social Security balance by reducing Social Security payroll tax revenue by $230 billion over ten years. This factor represents about 0.2 percentage points of the change in the actuarial shortfall. The remaining 0.1 percentage point comes from technical factors that CBO does not specify.

Change in Social Security Long-Term Projections
  75-Year Change (Percent of Payroll)
September 2013 Shortfall 3.4%
   
Economic Projections (Interest Rates) +0.3%
Ten-Year Projections (Revenue) +0.2%
Other Changes +0.1%
July 2014 Shortfall
4.0%

How Much of a Payroll Tax Increase Would It Take to Fix Social Security?

Around this time of year, the Social Security Trustees usually issue their report on the status of the program over the next 75 years. In advance of that release, CBO has provided a report to Senate Finance Committee ranking member Orrin Hatch (R-UT) with options for making Social Security solvent over 75 years through payroll tax increases. If no action to address the insolvency is taken, Social Security will see a 23 percent across-the-board benefit cut in the early 2030s. Because CBO's own estimate of Social Security's shortfall is larger than the Trustees', it finds that larger increases would be required to keep Social Security solvent than the Trustees estimate.

Closing the 75-year shortfall through the payroll tax alone would require an immediate 3.54 percentage point increase in the payroll tax rate (to 15.94 percent), compared to the 2.7 percentage point necessary increase projected by the Trustees. CBO also evaluates increases in the cap on income subject to Social Security payroll taxes (the "taxable maximum"), which is currently set at $117,000 for 2014 and increases with average wage growth each year. The cap currently covers 83 percent of wages; raising it to 90 percent would close 30 percent of the funding gap, and eliminating the cap altogether would close 45 percent.

The report also shows that getting to 75-year solvency would require a 2.3 percentage point payroll tax increase in combination with the 90 percent option and a 1.6 percentage point payroll tax increase for the elimination option. There are a number of permutations of these options included in the report, which you can see below.

Senators Begich and Murray Propose Social Security Benefit Enhancements

Last week, Senator Mark Begich (D-AK) and Senate Budget Committee Chair Patty Murray (D-WA) introduced legislation that would make targeted increases to Social Security benefits.

Delaney and Cole Propose Social Security Commission

Reps. John Delaney (D-MD) and Tom Cole (R-OK) introduced the Social Security Commission Act of 2014 today, which would establish a statutory commission with a mandate to recommend ways to make Social Security solvent for at least 75 years. The policy prescriptions would then be subject to an up-or-down vote in Congress.

Rubio Proposes Retirement Program Reforms

As the Senate works this week to increase the debt, Sen. Marco Rubio (R-FL) outlined a series of reforms to Social Security, Medicare, and retirement accounts in a speech at the National Press Club on Tuesday.

Social Security's Worsening Financial Picture Since 2011

We have already shown how both federal health care spending and revenue projections have been revised downward by $900 billion and $4.2 trillion, respectively, through 2021 since CBO's March 2011 baseline. Another story -- one that is a continuation of a trend since the Great Recession -- is the deterioration of Social Security's finances.

CBO's Social Security Projections

In CBO's 2014 Budget and Economic Outlook released this week, they addressed the future of the federal government's largest program, Social Security. Social Security has two separate trust funds: one for Old Age and Survivors Insurance and one for Disability Insurance. It is clear from CBO's analysis that both face mounting fiscal challenges in the coming years.

Explaining the "Double-Dipping" Provision

As the Senate looks for offsets for an unemployment insurance extension, there is one provision that has gotten some attention: ending "double-dipping" for those receiving both UI and federal disability benefits.

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