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.
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.
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.
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.
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.
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
||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
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%|
|July 2014 Shortfall
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.