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The Future of Social Security 2011

CBO Examines the Government’s Largest Program


Social Security's promise in 1937. Will it work for you in the future?

Social Security's promise in 1937. Will it work for you in the future?

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Updated April 24, 2012

As the federal government's largest program, Social Security paid benefits to about 54 million people in 2010. Social Security may also be the federal government's largest moving target, mainly of politicians who claim the program is or will soon be bankrupt and unable to pay benefits to future generations. To be sure, unless Congress takes steps necessary to prevent it, that sad day will eventually come. But even if Congress does nothing, as Congress often does, Social Security's "doomsday" will not come as soon as its critics would have you believe, according to the nonpartisan Congressional Budget Office (CBO).

Background: Financing Social Security
Who Gets Social Security? Of the 54 million people who received Social Security benefits in 2010, about 69% were retired workers, their spouses, and their children. Another 12% were the survivors of deceased workers.
The Social Security Trust Funds: All Social Security benefits are paid from one of two trust funds. Both retired workers and their survivors get their benefits from Social Security's Old-Age and Survivors Insurance (OASI) benefit trust fund. The remaining 19% receiving benefits are disabled workers or their spouses and children. They get their benefits from Social Security's Disability Insurance (DI) benefits trust fund.
Note: While it is administered by the Social Security Administration, the Supplemental Security Income (SSI) benefit program is not funded from either of the Social Security trust funds. Instead, SSI benefits are paid with funds from the U.S. Treasury generated from income taxes paid be individuals and corporations.
Social Security Payments Breakdown: According to the Congressional Budget Office (CBO) report 2010 Long-Term Projections for Social Security, Social Security represented one-fifth of the fiscal year 2010 federal budget, with total outlays of $706 billion. Of the total $706 billion Social Security benefit payments made in 2010, about 82% or $580 billion went to retirees and their survivors from the OASI fund, while about 18% or $126 billion went to disabled workers and their families from the DI fund.

How Social Security is Funded: The money to pay Social Security benefits comes from two main sources: payroll taxes and, to a much lesser extent, income taxes paid on benefits. In 2010, the CBO reported that about 97% of all tax revenues taken in by Social Security came from payroll taxes deducted from workers' paychecks. In 2010, the Social Security payroll tax was 12.4% of the worker's earnings, split evenly by workers and their employees, with each paying 6.2%. Self-employed workers pay the entire 12.4% Social Security tax on earnings themselves.

The other 3% of Social Security's tax revenue comes from income taxes paid by higher-income beneficiaries on their Social Security benefits. Revenues from taxes, along with intragovernmental interest payments, are credited to Social Security's two trust funds -- one for OASI and one for DI -- and all Social Security benefits and administrative costs are paid from those funds.

Both the OASI and DI trust funds are designed to grow over time and maintain surpluses. At the end of 2010, the OASI trust fund held about $2.4 trillion, while the DI trust fund held $187 billion, according to the CBO.

So What's the Problem? In 2010, Social Security paid out $706 billion, but took in only $670 billion from taxes. So, according to the CBO, the Social Security program's fiscal year 2010 outlays - benefits plus administrative costs - exceeded its tax revenues for the first time since enactment of the Social Security Amendments of 1983. That's the problem.
The Future of Social Security
So in 2010, Social Security came up $36 billion short. But, all benefits were paid, and both the OASI and DI trust funds, while shrinking, remained solvent. However, as the CBO report points out, as more baby-boomers retire and revenues from taxes fail to increase, Social Security benefit payments and administrative costs will start to "regularly" exceed tax revenues in 2016.

As a result, projects CBO, the DI Social Security trust fund - the one that pays disabled workers or their spouses and children - will be exhausted in fiscal year 2018, while the OASI trust fund - the one that pays retired workers and their survivors - will last until 2042.

Note: In 2011, the Social Security Board of Trustees projected that the combined Old-Age and Survivors Insurance (OASI), and Disability Insurance (DI) trust funds would be exhausted in 2036. In its 2012 Annual Report to Congress, the Board of Trustees revised their estimate downward by three years, suggesting the OAS-DI trust funds would become exhausted in 2033.

If the Trust Funds Go Broke: When the trust funds run out of money, Social Security will be unable to pay full benefits to recipients unless Congress changes the Social Security law.

Under current law, the Social Security Administration may not pay scheduled monthly benefits if the total dollar amount of those payments exceeds the amount of money in the trust funds. In that event, Social Security has no legal option but to reduce benefit payments to beneficiaries to the point that the total payments from the trust funds are equal to the tax revenues flowing into them.

What Can Congress Do? Assuming doing nothing is not an option, Congress could do what it did in 1994, when the DI trust fund came perilously close to running out of money. In that incident, Congress simply passed a bill that shifted money from the larger OASI trust fund to the DI fund. If Congress were to take similar action today, the CBO estimates the added drain on the OASDI fund would cause it to run out of money by 2039, instead of 2042.

In its report Social Security Policy Options 2010, the CBO suggests several other options available to Congress for preserving Social Security. The most obvious of these include:
  • Increase the Social Security payroll tax: The most direct, but most painful, this option would increase the funds available to the trust funds by simply increasing the current 12.4% Social Security payroll tax deduction.
  • Increase the full retirement age: This is the age at which a qualified worker can begin drawing their full Social Security benefit. Depending on their date-of-birth, a worker's full retirement age now ranges from 65- to 67-years. See: Applying for Social Security Retirement Benefits, for details.
  • Reduce the cost-of-living adjustments applied to benefits: At the end of each year, the Social Security Administration adjusts each beneficiary's benefit payment by an amount that is equal to any increase in the consumer price index (CPI). Typically, this results in a slightly larger monthly check for beneficiaries. However, when the CPI declines, as it did in 2009 and 2010, no cost-of-living increase is applied to Social Security benefits.

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