Social Security's Worsening Financial Picture Since 2011
We have already shown how both federal health care spending and revenue projections have been revised downward by $900 billion and $4.2 trillion, respectively, through 2021 since CBO's March 2011 baseline. Another story -- one that is a continuation of a trend since the Great Recession -- is the deterioration of Social Security's finances.
The projected gap between benefits and revenue from 2011 to 2021 has grown by $520 billion. As a share of GDP, the 10-year gap has grown from about one-quarter percent of GDP in the March 2011 projection to about one-half of a percent in the latest projections.
In addition, CBO has moved up its projected exhaustion date for the combined Social Security trust fund from 2038 in their June 2011 long-term projections to 2031 in their September 2013 projections, and that date may move even earlier if CBO's projections for the program continue to worsen. So what has caused the change?
In nominal dollar terms, the entire increase in the shortfall is due to depressed payroll tax revenues. As a percent of GDP, however, both the spending and revenue side are responsible. Over ten years, projected Social Security spending has risen by 0.1 percent of GDP while projected revenue (excluding interest) has fallen by the same amount. At the end of the decade, revenue is projected to be 0.2 percent of GDP lower than initially estimated while spending is projected to be 0.1 percent higher. The deterioration in revenue grows over time as a percent of GDP, while the spending change is relatively uniform throughout.
Not surprisingly, the bulk of the decline in revenue occurs in the main financing source of Social Security: the 12.4 percent payroll tax. That revenue declined by about 6 percent due to both economic and technical changes. Revenue was revised down multiple times as CBO forecasted lower GDP growth and, consequently, lower wage and salary growth. Technical revisions to payroll tax revenue mainly involve the tax base, which was reduced as CBO projected a greater share of income growth going to higher-income taxpayers. Since the payroll tax only applies to income below a certain amount ($117,000 in 2014, adjusted annually for average wage growth), a larger share of income growth going to people with incomes above the taxable maximum reduces the tax base for any given level of wages and salaries.
In terms of spending, there have been small changes in both the Old Age and Survivors' Insurance (OASI) and the Disability Insurance (DI) components of the program. The former category has been revised up by $30 billion, or 0.3 percent, while the latter category has been revised down by $65 billion, or 4 percent. Economic changes, which affect the growth rate of benefits going forward, pushed spending up, while technical changes, which affect enrollment and average initial benefit levels, pushed spending down by slightly more.
Non-payroll tax revenue dedicated to the trust fund also went down. Taxes on Social Security benefits fell by about $70 billion, presumably due to the 2013 fiscal cliff deal's extension of lower tax rates, which are applied to a portion of benefits for certain people. Finally, interest income to the trust fund declined by almost $300 billion due to the reductions the trust fund balance as a result of the other changes and lower interest rates.
The combined effect of all these changes is to accelerate the decline in the balance of the trust fund. Whereas the March 2011 baseline had the trust fund ratio (assets to benefits) declining from about 370 percent to 275 percent by 2021, the most recent baseline has it declining to 210 percent. As mentioned before, the trust fund exhaustion date has already moved up by seven years between 2011 and 2013 projections, and based on this year, it may prove to be earlier. The Disability Insurance trust fund itself has seen its exhaustion date moved up a year from 2018 to 2017.
Even without changing projections, waiting to make reforms to Social Security will only require that those changes be bigger later on. Adding in worsening projections from CBO makes this fact even more salient.