Today, 47 million Americans receive some form of Social Security benefit. As the baby-boom generation begins to retire, that number will rise considerably. Under the laws that currently govern Social Security, spending for the program will increase from about 4.4 percent of the nation's gross domestic product (GDP) now to more than 6 percent of GDP in 2030, the Congressional Budget Office (CBO) projects. In later years, outlays will continue to grow steadily as a share of GDP, though more slowly. Over the long term, paying the Social Security benefits scheduled under current law will require economic resources totaling between 5 percent and 8 percent of GDP, CBO projects.

At the same time, the federal revenues dedicated to Social Security will remain close to their current level--about 5 percent of GDP--in the absence of changes to the program. Thus, annual outlays for Social Security are projected to exceed revenues beginning in 2019. Even if spending ends up being lower than expected and revenues higher than expected, a gap between the two is likely to remain for the indefinite future.

Only four approaches to narrowing that gap exist, and each of those approaches has drawbacks:

• The benefits scheduled to be paid under current law could be reduced, lowering Social Security's contribution to the income of future beneficiaries.



• The taxes that fund Social Security could be increased, drawing additional resources from the economy to the program.



• The resources consumed by other federal activities could be cut to make up for the shortfall in Social Security. However, the aging of the U.S. population and increases in medical costs will also lead to higher costs for other entitlement programs, most notably Medicare and Medicaid.



• Federal borrowing could be increased, which would also draw additional resources from the economy to Social Security. But that borrowing would need to be repaid by future generations, either through higher taxes or lower spending.

Any changes to Social Security will have to be made in the context of the pressures on the total federal budget. CBO projects that spending for government health programs will grow even faster than spending for Social Security because of rising health care costs. In particular, increasing outlays for Medicare and Medicaid are projected to cause long-term shortfalls in the rest of the budget that will be even greater than Social Security's. Unless taxation reaches levels that are unprecedented in the United States, current spending policies are likely to result in an ever-growing burden of federal debt held by the public, which will have a corrosive and potentially contractionary effect on the economy.⁽¹⁾

Ultimately, the nation's ability to support Social Security beneficiaries will depend on the size of the economy. Different changes to that program will have different economic effects. The taxes paid and benefits received by program participants embody important incentives that will affect their choices about work and saving. Decisions to raise revenues, borrow, or reduce spending will therefore influence economic growth.

The long-term nature of Social Security's structural imbalance--along with the desirability of phasing in any policy changes over many years so participants have time to adjust their plans accordingly--requires that analyses of proposed changes extend beyond the traditional 10-year horizon of federal budget projections. Moreover, if the Congress considers changes to Social Security law, it will benefit from receiving timely analyses of the impact of legislative proposals. To provide such analyses, CBO has developed the capacity to produce comprehensive long-term projections of Social Security's finances under current law and under a variety of possible legislative changes.

This report presents CBO's outlook for Social Security over the next 100 years under current law. Projections of various measures of Social Security's finances all show that outlays will continually grow faster than revenues, resulting in significant annual deficits in the system. Projections of benefit levels indicate that future generations will receive higher retirement benefits--and pay higher Social Security taxes--than current beneficiaries do, even after adjustment for inflation. However, those benefits will represent a smaller percentage of their pre-retirement earnings than is the case now. Such long-term projections are necessarily uncertain, but the general conclusions presented in this report hold true under a wide range of assumptions about future demographic and economic trends.
 

The Financial Outlook for Social Security

Social Security is currently running an annual surplus. In 2003, total outlays (benefits plus administrative costs) equaled 4.4 percent of GDP, whereas dedicated revenues (Social Security payroll taxes and the income taxes that some recipients pay on their benefits) equaled 5.0 percent of GDP. CBO projects that at the end of the century, revenues will equal nearly 5 percent of GDP, about the same as today (see Summary Figure 1). Outlays, by contrast, will increase substantially in the near future with the retirement of the baby-boom generation. Annual spending will outstrip annual revenues starting in 2019 and will reach 6.1 percent of GDP in 2030--nearly 40 percent higher than in 2003. With life expectancy continuing to increase, outlays are projected to keep growing thereafter: to 6.3 percent of GDP in 2050 and nearly 7 percent of GDP in 2100. CBO's projection of a widening gap between outlays and revenues is consistent with other analyses of the outlook for Social Security. That gap is the key economic indication of the shortfall between the program's spending commitments and dedicated revenues.

Summary Figure 1.

Source: Congressional Budget Office.

Note: The dark lines indicate CBO's projections of expected outcomes. In those projections, annual Social Security outlays exceed revenues starting in 2019, and scheduled benefits cannot be paid beginning in 2053. Shaded areas indicate the 80 percent range of uncertainty around each projection. (In other words, there is a 10 percent chance that actual values will be above that range, a 10 percent chance that they will be below it, and an 80 percent chance that they will fall within the range. Those uncertainty ranges are based on a distribution of 500 simulations from CBO's long-term model.)

a. Scheduled benefits and administrative costs.

b. Payroll taxes and revenues from the taxation of benefits.

By running an annual surplus, the Social Security system as a whole currently contributes to reducing the total budget deficit. However, CBO's projection indicates that within the next several years, that contribution will start to decline, and beginning in 2019, the Social Security system will either increase the size of the total deficit or reduce the size of the total surplus. That impact will grow over time as the system's gap widens.

Social Security's finances are often discussed in terms of the trust funds that are used in the federal budget to track outlays and revenues over the life of the program. Those trust funds are mainly accounting mechanisms and contain no economic resources. But they are important from a policy perspective, because Social Security's legal spending authority each year is limited to the total balance of the trust funds. CBO projects that the trust funds will become exhausted in 2052, after which spending authority will be limited to annual revenues--which are projected at that point to equal only about 80 percent of scheduled benefits.
 

The Distribution of Taxes and Benefits

An important part of understanding the economic impact of Social Security is examining the distribution of taxes and benefits among groups of participants. This study provides several measures of projected benefits received and Social Security taxes paid by people in various age and income groups. The different measures lead to different insights.

• People with high earnings receive higher benefits than people with low earnings do, and under current law, future generations will receive higher benefits than current beneficiaries do, even after adjustment for inflation.



• Future beneficiaries will live longer than today's beneficiaries and would therefore receive greater benefits over their lifetime even if their annual benefits stayed the same.



• Under the assumption that the Social Security payroll tax remains a constant portion of taxable earnings, future generations will pay higher taxes than current generations do, because taxable earnings are projected to increase over time even after adjustment for inflation.



• Low-earning workers have a larger percentage of their earnings replaced by Social Security than high earners do, and current beneficiaries have a larger percentage of their earnings replaced than future generations will.



• In Social Security, earlier generations of participants received very high benefits relative to the taxes they paid. As a result of that windfall, later participants receive less in total benefits, on average, than the total dedicated taxes they pay. That situation reflects the pay-as-you-go nature of the Social Security program, which results in a transfer from later generations to earlier generations.



• For workers with low lifetime household earnings, total Social Security benefits received over a lifetime exceed dedicated taxes paid over a lifetime, on average. The opposite is true for workers with average and above-average earnings. If the projected shortfall in revenues led to a reduction in benefits for all workers, those general patterns would remain similar for each income group.

Analyzing the Uncertainty of Social Security Projections

The uncertainty about Social Security that individuals and policymakers face is an important economic and policy consideration. To display the uncertainty inherent in long-term projections, CBO calculates not only basic projections for Social Security but also ranges of possible outcomes. To do that, CBO uses standard statistical techniques to analyze patterns of past variation in most of the demographic and economic factors that underlie the analysis, such as fertility and mortality rates, interest rates, and the rate of earnings growth. It then uses its model to run hundreds of projections, each time with random variations in the assumed values for those factors that are equivalent to the variation observed historically. Although any one of those simulations has little meaning, together they enable CBO to display the probability distribution of possible outcomes.

That probability distribution is shown in this study (as it is in Summary Figure 1) by the 80 percent range of uncertainty--the range within which there is an 80 percent chance that the actual value will fall. For example, although Social Security outlays are projected to equal about 6 percent of GDP in 2030, CBO's uncertainty analysis indicates that there is a 10 percent chance that outlays will be less than 5.2 percent of GDP in that year and a 10 percent chance that they will exceed 7.0 percent of GDP. In any case, they are certain to be notably higher than current outlays.