Wednesday, September 18, 2013

Big Social Security Changes from CBO

The Congressional Budget Office released on Tuesday its annual Long Term Budget Outlook, which includes updated projections for the financial health of the Social Security program. And those updates are significant – CBO projects Social Security’s 75-year deficit will equal 3.4 percent of taxable payroll. That means that an immediate and permanent 3.4 percentage point increase in the current 12.4 percent Social Security payroll tax would be sufficient to keep the trust fund solvent for 75 years (though not beyond). Last year, CBO projected the long-term deficit at only 1.9 percent of wages, meaning that this year’s projections raise the shortfall by roughly 79 percent.
What’s driving this change? Up until now, CBO has accepted the demographic projections made by Social Security’s Trustees, grafting onto them CBO’s own projections for economic variables. But CBO is now making its own demographic projections, including:
· Longer life expectancies: CBO projects slightly longer life spans than SSA, assuming life spans in 2060 of around 84.9 years rather than SSA’s 83.6 years. As a result, retirees will collect benefits longer.
· Longer work lives: CBO project that for each additional year of life, Americans will choose to work an additional 3 months, partially offsetting the negative budgetary effects of higher life spans
· Higher disability rolls: CBO projects that the ultimate disability rate will equal 5.6 individuals per 1000, versus 5.2 in previous reports.
· Higher unemployment: CBO projects a long-term average unemployment rate of 5.3 percent, versus 5.0 percent in prior reports.
The net result is a long-term Social Security deficit considerably worse than previously thought.
None of this changes how large the Social Security shortfall will be. These, after all, are projections and only the future will tell how things will turn out.
But for those who previously said that there’s no hurry to fix Social Security because the long-term deficit is small and easily managed, a near-doubling of that deficit should cause them to reconsider their positions.
Update: Jed Graham of Investors Business Daily notes that CBO now projects that the combined Social Security trust funds will become insolvent in the year 2031, which would trigger across the board benefit cuts throughout the program. And Jed himself predicted that CBO would make this change. Check out his article here.

1 comment:

WilliamLarsen said...

3,9% shortfall over 75 years. What is it in year 75? With each passing year the 75th year shortfall is much larger in percentage points than say this years shortfall. This means with each passing year the aggregate of the 75 year shortfall grows.

It will level off at 7 to 8%. This means the OASI tax of 10.6% will have to be 17.6 to 18.6% of payroll to pay scheduled benefits. The SS-DI tax will have to increase from 1.8% to 2.5%.

The problem is that a 10.%% payroll tax now would easily provide a person at age 67 more than 80% of their pre retirement wages indexed by inflation.

Another way to say this is if SS were selling as competing with let us say Exxon, Philips, Shell, BP, etc and these companies were selling gas for $3.50 a gallon, the SS gas station will be selling you gas at $11.32 a gallon. How long do you think the SS-gas station would stay in business?