CBO Posts Social Security Background Data

Each year, the CBO produces updated Social Security financing projections as part of its Long Term Budget Outlook. Following on from that, the CBO usually produces a second document with additional background information on Social Security alone. This year, CBO skipped the document part and just produced the data used for it, which makes sense since most of that background document is simply charts and tables. Below I’ll just highlight some of the data that spoke to me, but there’s a lot of useful information there for the wonk set.

To start, CBO projects a more pessimistic future for Social Security than do the Social Security Trustees. Over 75-years, the Trustees project an ‘actuarial deficit’ of 2.84% of taxable wages. That means that an immediate and permanent increase of the 12.4% payroll tax to 15.24% would be sufficient to keep the trust funds solvent for 75 years, though not longer. CBO, by contrast, projects a shortfall of 4.44% of payroll; that implies an increase in the payroll tax rate to 16.84%. Not someday, but immediately. Or, if we delay, even bigger increases. Or, alternately, significant benefit reductions.

On that front, this chart shows how much benefits would need to be cut to restore 75-year solvency, based on when the cuts were made and who they applied to. If we cut benefits across the board today, a 27% reduction would suffice to keep Social Security solvent. But if we wait until 2031, we’d need a 31% cut. Alternately, if we cut benefit only for new beneficiaries, to exempt current retirees and the disabled, cuts would vary between 33 and 43%.

This chart shows my preferred measure of benefit adequacy, which is the initial benefit as a percentage of inflation-adjusted career-average earnings. Knowing the current adequacy of benefits for different earner types gives us an idea of how much we could reduce benefits, and for who, without fatally undermining Social Security’s social insurance goals. These figures don’t include auxiliary (spousal) benefits, and they’re calculated net of income taxes levied on retirement benefits (this affects mostly upper earners today, but will hit middle- and upper-income retirees in the future). For middle earners, the average replacement rate declines from 60% for individuals born in the 1940s to 57% for those born in the 2000s. For low earners replacement rates are on the mid-90s throughout, which (IMO) explains many low earners don’t save much for retirement. For high earners replacement rates fall from the high to the mid-30s. While they clearly need to save, by these measures Social Security could cover roughly half an adequate retirement income even for he richest fifth of retirees.

My takeaways:

• The long-term Social Security shortfall could well be more than we think; anyone who claims it’s a “modest” problem needs to look at CBO’s numbers.
• No single approach is likely to be politically palatable; the tax increases or benefit cuts alone just won’t fly with Congress or voters. So in practice we’ll need a package that maybe – maybe! – they’ll accept.
• If we think today’s choices are hard, waiting only makes the choices harder. Congress, being about as present-minded as a 5-year old, usually prefers to kick the can down the road.
• Finally, Social Security benefits – particularly for the bottom 40% of the population – go a lot further toward providing an adequate retirement income than many people think. There’s room to trim, particularly for middle and high earners, without causing a retirement crisis.