Yesterday CBO released an updated analysis of the Social Security program, with lots of interesting ways of characterizing the range of uncertainty in the projections of benefits and taxes. The cover graphic (which is also Figure 1 on page 9) tells us the “bottom-line” story: it’s almost certain that Social Security revenues will start to fall short of scheduled Social Security benefits in 10-20 years. The report and the CBO Director’s Blog highlights several useful lessons that come out of what they see as their most interesting numbers.
First, while a shortfall in Social Security is almost certain, a shortfall larger than 2 percent of GDP is unlikely:
[T]he likelihood that outlays will exceed revenues in 2030 is about 97 percent, CBO projects, and there is almost a 50 percent chance that the gap will be larger than 1 percentage point of GDP; the chance of its being 2 percentage points (or more) of GDP is only 6 percent.
(This is what makes Social Security a relatively “small” problem compared with the challenges facing Medicare.)
Second, the shortfall threatens the net benefit of the program to younger generations, not older ones:
According to CBO’s projections, the 1940s cohort, for example, is virtually certain to receive all of its scheduled first-year benefit. The 1990s cohort has only a 32 percent chance of receiving all of its scheduled first-year benefit but an 84 percent chance of receiving at least 70 percent of that benefit.
So one could interpret this intergenerational distribution as the Social Security program providing less “insurance” to younger generations.
But third, what is considered a “fair return” to those younger generations depends on what measure of benefits one considers most relevant–which is a value judgment. So this is where many of us have (and will continue to have) disagreements…
- Based on the first-year benefit highlighted above (see Figure 5 on page 13), the “unfairness” can be characterized as younger generations facing a larger divergence of payable benefits compared with scheduled benefits. On the other hand, first-year payable benefits, in thousands of real (2008) dollars, are still higher for younger generations than older generations.
- Based on replacement rates (or how much of career-average annual earnings are “replaced” with first-year benefits–see Figure 7 on page 15), the shortfall in Social Security significantly reduces the (payable) replacement rate to younger generations below the scheduled benefits that would otherwise provide a replacement rate similar to that given to older cohorts.
- Based on lifetime benefits (see Figure 9 on page 17), even with the shortfall under the payable benefits scenario, median lifetime Social Security benefits to younger generations are still higher in real dollar terms than the median lifetime benefits to older cohorts. And there’s really no uncertainty about this in CBO’s analysis (based on Figure 12 on page 20).
- But based on the ratio of lifetime benefits to lifetime taxes (see Figure 13 on page 21), younger generations are likely to get a lower “lifetime return” on the taxes they paid into the system, compared with older cohorts. For example, the shortfall makes it more likely than not that middle-income individuals born in 1990-2000 (i.e., many of our kids and grandkids) will receive lifetime Social Security benefits that fall short of their lifetime Social Security taxes paid (providing negative lifetime return).
A fourth useful lesson, featured in Box 1 on page 3 of the report, is that the Bush income tax cuts worsen the outlook for the Social Security program–and not just the outlook for general revenues. Extending the tax cuts would reduce projected revenues from the taxation of Social Security benefits and hence increase the Social Security 75-year shortfall, to -0.47% of GDP or -1.30% of taxable payroll, compared with -0.38% of GDP or -1.06% of taxable payroll under the “extended baseline” used in the main projections. Yet another reason why we ought to think carefully before extending any of the Bush tax cuts and why our mental starting point ought to be the level of revenues achieved under the current-law baseline.
I’m sure they’re many other useful lessons from this CBO report, which I’m likely to focus on with greater detail in future posts, especially with input and feedback from some of you readers. And others will no doubt take away different highlights and different lessons. (Andrew Biggs has already commented on the report with a couple different posts on his blog.)