Social Security trust funds will become exhausted in 2043 so that full benefits can no longer be paid to retirees, the Congressional Budget Office warned in a new report issued yesterday.
"As the baby boom generation (people born between 1946 and 1964) continues to age, growth in the number of Social Security beneficiaries will pick up, and outlays will increase much faster than revenues," stated the report, "CBO's Long-Term Projections for Social Security: 2009 Update."
If legislative changes to the program are not made and the trust funds are exhausted by 2043, "the Social Security Administration will not have the legal authority to pay full benefits and the amounts that could be paid would be about 17% less than those scheduled under current law," said CBO director Douglas W. Elmendorf.
The CBO's projections are more optimistic than those reported by the Social Security trustees earlier this year. The trustees told Congress in May that the trust funds would run out of money in 2037.
The CBO report addresses the differences between the two sets of projections. First, the CBO and trustees made different assumptions about income taxes. The CBO projections assume that current income tax law will remain unchanged. When the tax cuts made by former President George W. Bush expire next year as planned, higher income-tax rates will rise, boosting revenue from the taxation of Social Security benefits. In contrast, the trustees assume income tax rates will remain similar to current levels over the 75-year projection level.
The two groups also differed in their assumptions on interest rates. The CBO assumed a real, or inflation-adjusted, interest rate of 3.0%, which was slightly higher than the trustees' assumed rate of 2.9%. The CBO's higher rate places less weight on the large deficits that occur in later years. Finally, the CBO projects faster growth of wages than the trustees: 1.4% compared to 1.1%. This also leads to smaller deficits, according to the CBO report.
According to the report, total outlays of Social Security funds plus administrative costs equaled 4.4% of gross domestic product in 2008, whereas revenues dedicated to the program - primarily payroll taxes but also income taxes on the Social Security benefits of higher-income beneficiaries - equaled 4.8% of GDP.
CBO projects that while outlays will continue to rise, reaching 6.2% of GDP in 2083, the revenues dedicated to the program will remain almost constant as a share of GDP over the next 75 years, edging up to 4.9% in 2083.