A new report from the Congressional Budget Office describes its long-term projections for Social Security, and it’s not a pretty picture.
Social Security—the largest single program in the federal budget—has two components: Old-Age and Survivors Insurance (OASI) provides benefits to retired workers, their eligible dependents, and some survivors of deceased workers. Disability Insurance provides benefits to disabled workers and their dependents.
If the gap between the two trust funds’ outlays and income occurs as CBO projects, then the balance in the trust funds will decline to zero in 2033 and the Social Security Administration will no longer be able to pay full benefits when they are due.
If that occurs and outlays are limited to what is payable from annual revenues (from payroll taxes and from income taxes on benefits) after the trust funds are exhausted, Social Security benefits would be about 23% smaller than scheduled benefits in 2034. They would be 35% smaller by 2096, and the gap would remain stable thereafter.
How outlays would be reduced is not specified in current law. For this report, CBO assumed that once the combined trust funds were exhausted, Old-Age and Survivors Insurance benefits and Disability Insurance benefits paid to all existing and new beneficiaries would be reduced by the percentage necessary to make the program’s total annual outlays equal its total available revenues.
In its 2022 annual report released back in June, the Treasury Department’s Social Security Board of Trustees found that Social Security will be able to pay scheduled benefits until 2034—one year later than it reported last year.
That report found that without changes, the OASI Trust Fund is projected to become depleted in 2034. At that time, continuing tax income would be sufficient to pay 77% of scheduled benefits—which is consistent with CBO projections.
The report also found the combined asset reserves of the OASI and DI Trust Funds are projected to become depleted in 2035, also one year later than projected last year, with 80% of benefits payable at that time.
A 4.9% payroll tax increase?
In another set of projections from the new CBO report, reflecting a scenario in which Social Security continues to pay benefits as scheduled under current law—regardless of whether the program’s trust funds have sufficient balances to cover those payments—CBO projects spending on the program would increase from 5.0% of gross domestic product (GDP) in 2022 to 7.0% in 2096, and revenues would remain around 4.6% of GDP over the same period.
In CBO’s projections, Social Security’s actuarial deficit over the next 75 years is equal to 1.7% of GDP, or 4.9% of taxable payroll. That is, the federal government could maintain the necessary trust fund balances through 2096 if it immediately, and permanently, raised payroll tax rates by about 4.9% (or implemented an equivalent reduction in benefits or combination of tax increases and benefit reductions). After 2096, however, the gap between revenues and outlays would widen, and shortfalls would continue to increase.
Given that the current Social Security payroll tax is 12.4% of earnings up to a maximum annual amount ($147,000 in 2022)—where workers and their employers each pay half and self-employed people pay the entire amount—increasing the payroll tax by 4.9% would bring the Social Security payroll tax to 17.3%.
Treasury official: Cuts would “decimate” standard of living
Speaking at the Brookings Institution’s Retirement Security Project Event last week, a senior U.S. Treasury official warned that cuts to Social Security and Medicare would “decimate” the standard of living for American retirees.
“It’s important to acknowledge the critical role of Social Security and Medicare in preserving retirement as we know it. These programs are the cornerstone of the American retirement system, and it is difficult to imagine either program sustaining substantial cuts in resources without dramatically impacting millions of beneficiaries,” said Assistant Secretary for Economic Policy Ben Harris. “There are a wide range of statistics that underscore this point, but I’ll offer a simple one: roughly half of retirement-age households depend on Social Security benefits for all or almost all of their income. Cuts to Social Security would decimate their standard of living.”
SEE ALSO:
• Here’s How Much Waiting Until 70 Boosts Social Security Income
• Historic 8.7% Social Security COLA Finalized for 2023
• 3 Bills Aiming to Strengthen Social Security: A Closer Look
• Bernie Sanders: Expand Social Security; Lindsey Graham: Take Less, Pay More