Congressional Budget Office
Director’s Blog

At a meeting of the Social Security Advisory Board, on April 21st, CBO staff presented four charts comparing our March 2008 and March 2009 projections of the income and spending of the Social Security trust funds. Those baseline projections cover 10 years and assume no changes in current law. (This summer, CBO will issue new projections of the long-term budget outlook, spanning 75 years.)

Over the 10-year period from 2009 through 2018, projected income and outlays have both declined significantly from our projections of a year ago—income is down by about $1.2 trillion (about 11 percent) and outlays are down by about $250 billion (about 3 percent) for that 10-year period (see Chart 1). Nearly all of the adjustments stem from changes in CBO’s economic forecast: our projections for inflation, real GDP, and interest rates have all declined relative to those underlying our March 2008 baseline. Lower inflation affects both revenues and outlays through lower payroll taxes and smaller cost-of-living adjustments (COLAs). Similarly, lower real GDP would imply lower real wages—and therefore less revenue from payroll taxes and, over time, a lower initial benefit amount for new beneficiaries. Finally, because projected interest rates are lower, the trust funds are expected to earn less interest income. Outlays projected for the first few years are now higher than we estimated in 2008 because of the larger-than-expected COLA (5.8 percent) that took effect in January 2009. (For a discussion of CBO’s projected COLA increases, see my recent blog. ) The decline in projected income and outlays has affected our projections of the trust funds’ annual surpluses and balances (see Charts 2-4). 

Current projections of total surpluses of the two trust funds—for Old Age and Survivors Insurance (OASI) and Disability Insurance (DI)—are much lower than last year’s estimates (see Chart 2). In 2018, for example, the trust funds are now projected to record a surplus (total income less expenditures) of $133 billion, compared with last year’s estimate of a $246 billion surplus.

The trust funds’ total surplus includes interest credited to the trust funds, based on the balances accumulated over many years.  That interest is an intragovernmental transaction and doesn’t affect the budget deficit. Another measure to assess the financial condition of the program is the primary surplus, which excludes interest credited to the trust funds. The projected primary surplus dips to $3 billion in 2010, recovers for the next several years, and then falls below zero beginning in 2017 (see Chart 3). When the primary surplus disappears, Social Security benefits exceed Social Security’s income from the public, and the operations of the Social Security system increase the federal deficit.

The projected balance in the OASI trust fund continues to grow throughout the 10-year period, albeit at a slower rate than CBO projected a year ago, reaching $3.9 trillion by 2019 (see Chart 4). In contrast, we expect that the DI trust fund balance will decline each year. CBO now anticipates that the DI trust fund will be exhausted in 2019, with available funds falling $29 billion below projected expenditures. At that time, absent a change in law, Social Security could not pay DI beneficiaries the full benefits to which they are entitled under the Social Security Act.

In yesterday’s blog, I discussed CBO’s projection that the recent decline in consumer prices and low expected inflation during the next few years will mean no COLAs in Social Security benefits until 2013. A zero Social Security COLA would have significant implications for the premiums charged to enrollees in Medicare Part B. 

Part B of the Medicare program covers physician services and outpatient care, including durable medical equipment, laboratory services, some physical and occupational therapists’ services, and some home health care.  Most beneficiaries pay a monthly Part B premium that is set to cover about 25 percent of the costs of Part B, with the balance coming from the general fund of the Treasury. 

Hold Harmless Provision.  Most Medicare enrollees have their Part B premium withheld from their monthly Social Security benefit. For those individuals, a “hold-harmless” provision guarantees that a benefit check will not decrease as a result of an increase in the Part B premium. The dollar increase in the Part B premium for a year is compared to the dollar increase in the Social Security monthly benefit. If the dollar increase in the premium is larger than the dollar increase in the Social Security benefit, then the increase in the Part B premium paid by the beneficiary is limited to the dollar increase in the Social Security benefit.

The hold-harmless provision does not apply to about one-quarter of Part B enrollees:

• New enrollees in Part B (because they did not have the premium withheld from their Social Security benefit in the prior year),
• Higher-income enrollees who are subject to an income-related premium, and
• Individuals who do not have the Part B premium withheld from their Social Security benefit, nearly all of whom have their premiums paid by Medicaid.

In most years, the hold-harmless provision has very little impact. For example, a 2 percent increase in a Social Security benefit of $1,000 per month results in a $20.00 benefit increase. (The average Social Security benefit for a retired worker is about $1,150 per month.) A 7 percent increase in the Part B premium (similar to benefit growth in recent years), applied to the current premium of $96.40, would increase the premium by $6.75—well under that benefit increase—and the hold-harmless provision would have no effect.

Under current law, however, CBO projects no benefit increase for Social Security beneficiaries from 2010 through 2012. As a result, by CBO’s estimate, almost three-quarters of Part B enrollees will have their premiums limited by the hold-harmless provision each year during that period.

The Role of Part B Premiums in Medicare Trust Fund Financing. The major components of income to the Part B trust fund account are premiums and a matching contribution that is transferred from the general fund of the Treasury. For aged enrollees, that matching contribution is $3 for every $1 in premium collections; there is a similar matching contribution for enrollees who are under 65.

The amount of the monthly premium is set so that total annual revenue to the Part B trust fund account (from premiums, matching contributions, and interest) is sufficient to cover annual expenditures from the trust fund and to maintain a contingency reserve of about two months of spending. Under normal circumstances, the premium is set to cover about 25 percent of the average cost per enrollee of Part B benefits (because the matching contribution covers the remainder). 

However, because almost three-quarters of Part B enrollees will be subject to the hold-harmless provision, the increase in premium revenue needed to draw matching contributions sufficient to cover the growth in annual spending and maintain the contingency reserve will have to be collected from the one-quarter of enrollees who are not eligible for the protection of the hold-harmless provision. As a result, the current-law increase in the monthly Part B premium for those individuals will be nearly four times the increase that would be required if no enrollees were subject to the hold-harmless provision.

Projected Part B Premiums in 2010 and Subsequent Years. CBO estimates that the Part B trust fund account will require about $220 billion in income from premium collections and matching contributions in 2010 to cover expenditures and maintain a contingency reserve, with larger premium collections required in subsequent years. CBO estimates that the hold-harmless provision, in conjunction with the zero COLAs projected for Social Security benefits, will result in the monthly Part B premium for beneficiaries not subject to the hold-harmless provision increasing to $119 in 2010, $123 in 2011, and $128 in 2012 (see note below).  Without the hold-harmless provision, CBO estimates that the monthly premium would be $103 in 2010 and would grow to about $109 in 2012, so the interaction of the hold-harmless provision and projected zero COLAs for Social Security will add significantly to the increases called for under current law. There is no effect on Part D premiums because there is no hold-harmless provision in Part D.

CBO expects that monthly premiums will be lower than $128 for a few years after 2012, as the number of beneficiaries subject to the hold-harmless declines. We estimate that the monthly Part B premium will decline to $114.50 in 2016 and then rise in subsequent years, reaching $135 in 2019. 

Note: Under current law, Medicare’s payment rates for physicians’ services are scheduled to be reduced by 21 percent in 2010 and by about 6 percent a year for several years thereafter. CBO’s premium projections assume that the premium for 2010 will be set to maintain an adequate contingency reserve in 2010 in the event that legislation to eliminate that 21 percent reduction is enacted after the premium is announced.  (The premium for 2010 will be announced in September 2009.) The projections also assume that the reductions in payment rates for physicians’ services that are scheduled for 2010 and subsequent years will go into effect, and that premiums in 2011 and subsequent years will reflect those reductions in payment rates.

The Social Security Administration (SSA) generally adjusts benefits payable each January based on the annual change in the consumer price index for urban wage earners (CPI-W) through the third quarter of the previous calendar year.  (More information about the CPI is available from the Bureau of Labor Statistics     <http://www.bls.gov/cpi/cpifaq.htm>.)  The index is based on a starting point of 100 for the 1982-1984 period.  In January 2009, Social Security beneficiaries received a benefit increase (often referred to as a cost-of-living adjustment or COLA) of 5.8 percent. That COLA reflected the increase in the CPI-W from 203.4 in the third quarter of 2007 to 215.2 in the third quarter of 2008 (215.2 divided by 203.4 equals 1.058, or a 5.8 percent change for that year-over-year comparison).

From the third quarter of 2008 to the first quarter of 2009, the CPI-W has fallen (by about 4 percent) to 206.5 largely reflecting the decline in energy prices from their historically high levels in 2008. Even though CBO anticipates that the CPI-W will rise a bit over the next several months, we project that it will be 209.5 for the third quarter of 2009, lower than the 215.2 CPI-W for the third quarter of 2008. By law, Social Security benefits are unchanged in years in which the change in CPI-W since the previous adjustment to benefits is zero or less than zero. Thus, CBO anticipates no COLA in January 2010.

Moreover, CBO projects that inflationary pressures will be very low over the next few years—in particular, our March 2009 economic forecast says that the CPI-W will not reach the level it attained in the third quarter of 2008 until late in 2011. (Under current laws and policies, CBO anticipates third-quarter-over-third-quarter increases in the CPI-W of 1.1 percent each year from 2010 to 2012.) As noted, a Social Security COLA will not be triggered until the CPI-W for the third quarter of a year exceeds its level in the third quarter of 2008. We project that the CPI-W will reach 217.0 in the third quarter of 2012, triggering a 0.8 percent COLA payable in January 2013. Thus, even though CBO is projecting price increases in fiscal years 2010 and 2011, those annual price increases would not be large enough to offset the price declines that have already taken place in recent months. Beneficiaries in other federal programs, including civil service and military retirement, and those drawing veterans’ compensation and pensions, also will not receive COLAs in 2010, 2011, or 2012, by CBO’s projections, because their COLAs are tied to Social Security’s under current law.

The absence of COLAs will affect payments of Social Security taxes and the base for calculating benefits for new beneficiaries because it will affect the maximum amount of wages that are subject to Social Security, known as the taxable maximum. The Social Security Act specifies that the taxable maximum increases only in years in which a COLA occurs. Thus, under CBO’s forecast, that maximum will be frozen until 2013. At that time, the contribution and benefit base will increases by the change in the national wage index since the last time a COLA was triggered. Following those current-law rules, CBO anticipates the base will hold steady at $106,800 for 2009 through 2012, and then jump to $118,200 in 2013, reflecting the cumulative change in the national wage index during the period of no COLAs.

In contrast, CBO projects that the initial benefits for newly eligible beneficiaries will continue to rise each year because those benefit calculations are linked to the annual growth in earnings and not tied to COLAs. Wage-indexing is applied to a person’s earnings history, and the dollar values in the three-bracket benefit formula are adjusted by the annual percentage change in average earnings.  (The adjustments to the national wage index are permitted to be negative if wages were to decline.)

Tomorrow’s blog will discuss the implications of the projected zero COLAs for the premiums charged to enrollees in Medicare Part B.

The Troubled Asset Relief Program (TARP) gives the Department of the Treasury authority to purchase or insure up to $700 billion of outstanding assets at any one time.  Under the Emergency Economic Stabilization Act of 2008, which provided that authority, the federal budget is supposed to reflect an estimate of the ultimate net cost of the transactions for the TARP as opposed to recording the gross cash disbursements under the program (and later recording cash receipts for any earnings or purchase redemptions). Broadly speaking, the estimated net cost is the purchase cost minus the present value—calculated using an appropriate discount factor that reflects the riskiness of the assets—of any estimated future earnings from holding the assets and the proceeds from their eventual sale.

CBO currently estimates that the net cost of using the TARP’s full $700 billion in purchase authority will total $356 billion—$336 billion to be recorded in 2009 and $20 billion to be recorded in 2010. That estimate amounts to a roughly 50 percent net subsidy—that is, roughly one-half of the gross purchase authority. CBO’s most recent estimate of the TARP’s cost is higher than what we presented in January:  by $152 billion for this year and $15 billion for next year (at that time, our estimated net subsidy was approximately 27 percent of the $700 billion purchase authority).  The revisions stem from three factors:  changes in financial market conditions, new transactions, and a small shift in the anticipated timing of disbursements.

By the beginning of March, when CBO’s most recent estimate was completed, market yields on securities issued by the firms that had received TARP funds were higher than they were a few months earlier.  We use those yields in the present-value calculations to reflect the riskiness of the government’s loans and investments.  Because those yields have risen, the estimated subsidy cost of the Treasury’s purchases of preferred stock, asset guarantees, and loans to automakers has also increased. Also, during that period, the Treasury announced additional deals with Bank of America and American International Group (AIG), as well as participation of up to $50 billion in the Administration’s foreclosure mitigation plan, all of which involve higher expected subsidy rates than the 27 percent average subsidy in our January projections. Finally, CBO now assumes that more transactions would occur after October 1, which pushes the recognition of more of the subsidy cost into fiscal year 2010.

Because the ultimate cost of the TARP depends directly on market value of the financial assets involved, that net cost is very uncertain.  The eventual cost may well be significantly different than CBO’s current estimate, and could be either higher or lower than the roughly 50 percent subsidy embodied in our most recent projections.

Today CBO released the latest Monthly Budget Review, reflecting an analysis of budget data through the end of March 2009. CBO estimates that the Treasury Department will report a deficit of about $953 billion for the first six months of fiscal year 2009, $640 billion more than the deficit recorded through March 2008.

Budget accounting issues are clouding the deficit forecasts for this year. The above estimate of this year’s deficit to date includes outlays of about $290 billion for the Troubled Asset Relief Program (TARP). Although the Treasury has been recording most spending for the TARP on a cash basis, CBO believes that the budget should record the program’s activities on a net present-value basis adjusted for market risk. Using that approach, CBO estimates that outlays of $140 billion should be recorded for the TARP through March. That approach would yield an estimated deficit of $803 billion for the first half of the year.

March receipts were estimated to be about 30 percent lower than receipts in March 2008. More than half of the decline reflects a drop in net corporate income tax receipts, which fell by 90 percent from March of last year, in part because firms may be applying current-year losses to obtain refunds of taxes paid in previous years.

Federal outlays were $89 billion (or 39 percent) more than those last March, by CBO’s estimates. About half of the increase in spending comes from $46 billion in cash infusions to Fannie Mae and Freddie Mac (now taken over by the government); another $10 billion was lent to credit unions by an arm of the Treasury, and Medicaid spending rose by $10 billion, of which $8.5 billion was due to provisions in the economic stimulus legislation. Outlays for unemployment benefits increased by $7 billion, defense spending by $5 billion, and Social Security benefits by $4 billion.

In March, CBO issued new estimates for the budget outlook for fiscal year 2009. We project that the deficit for 2009 will be $1.7 trillion under current laws and policies and $1.8 trillion if the President’s proposals for the current fiscal year are enacted. (Click here to link to A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook).

We have just released our latest projections for the budget and economic outlook, updating the projections published in early January 2009. In addition, we have reviewed the President’s budgetary proposals contained in the February publication A New Era of Responsibility: Renewing America’s Promise, and our report summarizes our preliminary analysis of that budget plan.  For a detailed discussion of the economic forecast underlying the report click here.

Our updated budget projections indicate that:

• Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, CBO’s baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. Those projections assume that current laws and policies remain in place. Under that assumption, CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next year—the largest deficits as a share of GDP since 1945. Deficits would shrink to about 2 percent of GDP by 2012 and remain in that vicinity through 2019.
• Under current laws and policies, outlays are projected to decline from 27.4 percent of GDP in 2009 to about 22 percent in 2012 and subsequent years, as spending related to the current recession phases out, problems in the financial markets fade, and discretionary spending–under the assumptions of the baseline–declines as a share of GDP.
• At the same time, under current laws and policies, revenues are estimated to rise from 15.5 percent of GDP in 2009 to about 20 percent in 2012 and subsequent years. Much of that projected increase in revenues results from the growing impact of the alternative minimum tax (AMT) and, even more significant, the scheduled expiration in December 2010 of provisions enacted in the recent economic stimulus legislation and tax legislation in 2001 and 2003.

Our analysis of the President’s budget proposals indicates that:

• As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.
• The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).
• Proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion over the next 10 years. Proposed changes in spending programs would add $1.7 trillion (excluding debt service) to outlays over the next 10 years. Interest costs associated with greater borrowing would add another $1.0 trillion to deficits over the 2010–2019 period.
• Our estimates of deficits under the President’s budget exceed those anticipated by the Administration by $2.3 trillion over the 2010-2019 period. The differences arise largely because of differing projections of baseline revenues and outlays. CBO’s projection of baseline deficits exceeds the Administration’s estimate (prepared on a comparable basis) by $1.6 trillion.

Our current assessment of economic developments indicates that:

• Although the economy is likely to continue to deteriorate for some time, the enactment of the American Recovery and Reinvestment Act and very aggressive actions by the Federal Reserve and the Treasury are projected to help end the recession in the fall of 2009. In CBO’s forecast, on a fourth-quarter-to-fourth-quarter basis, real (inflation-adjusted) GDP falls by 1.5 percent in 2009 before growing by 4.1 percent in both 2010 and 2011.
• For the next two years, CBO anticipates that economic output will average about 7 percent below its potential—the output that would be produced if the economy’s resources were fully employed. That shortfall is comparable with the one that occurred during the recession of 1981 and 1982 and will persist for significantly longer—making the current recession the most severe since World War II. In this forecast, the unemployment rate peaks at 9.4 percent in late 2009 and early 2010 and remains above 7.0 percent through the end of 2011. With a large and sustained output gap, inflation is expected to be very low during the next several years.

Over the past week CBO has released a number of products related to the stimulus efforts in Congress. On Wednesday, CBO released a letter on the macroeconomic impacts of H.R. 1 that included year-by-year analysis of the economic effects of the stimulus legislation. (This analysis was based on an average of the effects of two versions of H.R. 1– as passed by the House and as passed by the Senate. The economic effects of those two bills were projected to be broadly similar). Today, CBO released a cost estimate of the conference agreement for H.R. 1, as posted on the Web site of the House Committee on Rules.

CBO estimates that enacting the conference agreement for H.R. 1 would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, by $399 billion in 2010, by $134 billion in 2011, and by $787 billion over the 2009-2019 period (combining both spending and revenue effects). The table below summarizes the estimated budgetary impacts of the conference agreement legislation.

This evening, CBO released its Monthly Budget Review, reflecting an analysis of budget data through the end of January.  CBO estimates that the Treasury Department will report a deficit of $563 billion for the first four months of fiscal year 2009, $474 billion higher than the deficit incurred through January 2008. This year’s deficit to date includes estimated outlays of $284 billion for the Troubled Asset Relief Program (TARP). Although the Treasury is recording most spending for the TARP on a cash basis, CBO believes that the budget should record all of the program’s activities, including equity investments, on a net present-value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008. Using that approach, CBO estimates that outlays of $76 billion should be recorded for the TARP through January, which would yield an estimated deficit of $355 billion through January.

Receipts for the first four months of fiscal year 2009 were about $88 billion (or 10 percent) lower than receipts during the comparable period last year. Almost half of the decline, or $43 billion, resulted from lower net corporate receipts, which fell by 43 percent. Declines in those receipts reflect the continued weakness in corporate profits stemming from the recession.

Outlays through January totaled $1,337 billion, CBO estimates—$387 billion more than in the same period last year.  That amount includes expenditures of $284 billion for activities by the TARP (under the cash treatment used by the Treasury) and $14 billion of equity injections for Freddie Mac. Spending for other federal programs was $123 billion higher than in the first four months of 2008; adjusted for calendar-related shifts in the timing of certain payments, program outlays rose by 12 percent (about $101 billion). In contrast, outlays for net interest on the public debt fell by 39 percent, or $35 billion, over that period because of lower costs for inflation-indexed securities and a decline in short-term interest rates.

Today CBO released a cost estimate for a proposed Senate substitute amendment to H.R. 1, the American Recovery and Reinvestment Act of 2009, introduced by Senators Inouye and Baucus on January 31st. The amendment would specify appropriations for a range of federal programs and would increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs; it also would reduce individual and corporate income tax collections in a number of ways, including an alternative minimum tax (AMT) patch for 2009 and a tax credit of up to $500 for each worker in both 2009 and 2010.

CBO estimates that if enacted in mid-February, H.R. 1 as amended would increase outlays by $132 billion during the remaining several months of fiscal year 2009, by $242 billion in fiscal year 2010, by $145 billion in 2011, and by a total of $632 billion over the 2009-2019 period. In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the proposed Senate amendment to H.R. 1 would reduce revenues by $101 billion in fiscal year 2009, by $219 billion in fiscal year 2010, and by a net amount of $253 billion over the 2009-2019 period. (Approximately $96 billion of the estimated revenue change is attributable to the proposed tax credit for wage earners and $70 billion to the proposed changes in the AMT.)

Combining those effects, CBO estimates that enacting the Senate amendment would increase federal budget deficits by $233 billion over the remaining months of fiscal year 2009, by $461 billion in 2010, by $142 billion in 2011, and by about $884 billion over over the 2009-2019 period. The table below summarizes CBO’s and JCT’s estimates of the legislation’s budgetary effects.

These estimates differ from CBO’s cost estimates for similar legislation considered in the House of Representatives last week. On January 30, CBO transmitted a cost estimate for H.R. 1 as passed by the House on January 28, 2009; and on January 26, we transmitted a cost estimate for the bill as introduced in the House on that date.  CBO and JCT estimated that the version of H.R. 1 that was passed by the House of Representatives would increase deficits by $526 billion over the 2009-2010 period and by a total of $820 billion over the 2009-2019 period; the Senate amendment would increase the deficit by $694 billion over the 2009-2010 period and by about $884 billion over the 2009-2019 period. 

Much of the difference in the 11-year totals comes from the Senate amendment’s AMT provisions, which would reduce revenues by about $70 billion. The most significant difference in outlays from discretionary funding in the House and Senate versions stems from the proposed State Fiscal Stabilization Fund: both versions would appropriate $79 billion for this new activity, but CBO estimates outlays of about $31 billion over the 2009-2010 period under the House-passed version of H.R. 1 and about $52 billion over the 2009-2010 period under the Senate amendment.  The difference reflects the fact that the House version would provide the funding in two components, the first available for obligation beginning July 1, 2009, and the second a year later; the Senate proposal would provide all the funding in 2009.

CBO released an estimate of the budgetary impacts of H.R. 1, the American Recovery and Reinvestment Act of 2009, as amended and passed by the House of Representatives on January 28. Over the 2009-2019 period, CBO estimates that enacting H.R. 1 would increase budget deficits by about $820 billion.

CBO’s estimate for H.R. 1 as passed by the House of Representatives is about $3.7 billion greater over the 2009-2019 period than the corresponding amount shown in CBO’s January 26th cost estimate for the version of H.R. 1 that was introduced on that day. That difference is attributable to four provisions adopted by the House of Representatives. An amendment to increase funding for the Department of Transportation’s transit programs by $3 billion accounts for most of the added costs over the 2009-2019 period.

There are also some changes in the allocation of budgetary impact between revenue and outlays. CBO, in consultation with JCT, has concluded that the subsidy for health insurance assistance for the unemployed should be treated as an increase in outlays rather than a decrease in revenues. Although this treatment is different from that in the table provided in our estimate for H.R. 1 as introduced on January 26, the overall effect on the budget remains the same for each year. JCT has also adjusted its estimates of the mix of revenue losses and outlay increases associated with certain refundable tax credits; that change also has no effect on the budget totals for each year.