The Congressional Budget Office released updated projections of Social Security's long-term financing, finding an even larger long-term deficit than in the Office’s previous calculations.
The new figures, released December 21, find Social Security’s combined retirement and disability trust funds running out in the year 2029, after which benefits would be cut across the board by 29 percent.
Over the full 75-year measurement period, Social Security is projected to run an actuarial deficit of 4.68 percent of taxable payroll, meaning that Social Security is underfunded by 25 percent over the next 75 years. In the CBO’s previous figures, calculated in late 2015, the 75-year shortfall was 4.4 percent of payroll. Social Security’s trustees and actuaries project a smaller 75-year deficit of 2.66 percent of taxable payroll.
One way to think of the actuarial deficit is the size of the payroll tax rate increase – taking place immediately and staying in effect permanently – that would keep Social Security’s trust fund solvent for 75 years. So, if we immediately raised the payroll tax rate from the current 12.4 percent to 17.08 percent, that would be enough to keep the program solvent for 75 years.
Alternately, we could reduce benefits – again, immediately and permanently – by about 25 percent. Or we could rely upon a range of other policy changes, such as raising or eliminating the $127,200 payroll tax ceiling, increasing the retirement age, lowering Cost of Living Adjustments, and so on. The effects of some of these policies are calculated in CBO’s recent publication on options to reduce the federal deficit.
Many reformers have a difficult time fixing Social Security’s funding gap even under the more forgiving projections from Social Security’s trustees. Using CBO numbers, which show a long-term deficit 75 percent higher than the trustees, the challenge is even greater. One strategy: take all reforms you favor and all the reforms you hate, then put them together. Combined they might fix the problem.
CBO’s new Social Security publication also includes updated figures on the replacement rates paid by Social Security, which measure Social Security benefits as a percentage of pre-retirement earnings. The CBO’s figures find that for an average retiree, Social Security benefits replace 40-45 percent of substantial earnings in the years approaching retirement. As I argue in this recent working paper, the CBO’s approach effectively compares Social Security benefits to an “average of above-average earnings” in the years preceding retirement.
A better approach, I argue, compares Social Security benefits to the inflation-adjusted average of career-long earnings. Luckily, CBO publishes a data appendix that includes these figures; they find that Social Security replaces from 55 to 65 percent of real career-average earnings.
However, both approaches find that replacement rates are rising for lower-earning participants and falling for high earners. The reason is that Social Security benefits are indexed to rise along with national average wages. The poor have seen their wages stagnate, meaning that Social Security benefits will be higher relative to their pre-retirement earnings. The rich, by contrast, have seen faster wage growth. But the growth of Social Security benefits has not kept up, lowering the replacement rates the receive from the program. This change in replacement rates shows how Social Security has partially offset the increased inequality of pre-retirement earnings.