In order for Social Security to pay out scheduled benefits, and remain solvent in the long run, payroll taxes would have to be raised “immediately and permanently” by 4.6 percent. (Photo: Shutterstock)
Massive budget deficits over the next 30 years are expected to nearly double the country's total debt, from 78 percent of gross domestic product, where it is today, to 144 percent of GDP by 2040, according to the Congressional Budget Office's annual Long-Term Budget Outlook report.
The CBO's extended baseline projections are based off the same assumptions the agency uses to forecast its 10-year projections. Both forecasts presume current law remains the same, mandatory programs are extended, and Social Security and Medicare spending continue as scheduled even after their respective trust funds run dry.
CBO projects Social Security's two trust funds will be depleted in 2032, before the Social Security Administration's 2035 projection.
Under current law, that would mean Social Security checks would be reduced by 24 percent in 2033, and 29 percent by 2049, according to CBO.
In order for Social Security to pay out scheduled benefits, and remain solvent in the long run, payroll taxes would have to be raised “immediately and permanently” by 4.6 percent, scheduled benefits would have to be reduced by the same amount, or some combination of the two measures would have to be adopted.
Social Security is the largest single component of today's federal budget. Its 64 million beneficiaries in 2019 are projected to rise to 97 million in 2049.
But the revenue from payroll taxes and taxes on benefits that fund the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund will remain flat over the next 30 years, at about 4.4 percent of GDP.
An aging population will drive Social Security and Medicare spending as a percentage of GDP. Today, Social Security spending accounts for 4.9 percent of GDP. By 2029, it will be 5.5 percent, and 6.2 percent by 2049.
Medicare and all other health care programs now account for 5.2 percent of GDP. That rises to 6 percent by 2029, and 8.8 percent by 2049.
In 30 years, mandatory spending on scheduled benefits for the population age 65 and older will account for half of all non-interest spending in the budget. Today the share is about two-fifths, according to CBO.
The inherent uncertainty of extended forecasting is acknowledged in CBO's report. Even under the most optimistic scenarios, debt will rise well over today's levels. For instance, if interest rates rise 1 percentage point higher annually than the CBO forecasts, debt would be 199 percent of GDP by 2049. If rates fall 1 percentage point lower than projected, debt would be 107 percent of GDP.
|What if Social Security benefits were cut?
CBO also provides analysis on the Social Security's long-term budget implications if benefits were limited to revenues in the program after the trust funds are depleted.
The 30-year debt-to-GDP ratio projection would drop to 106 percent, 38 percentage points lower than the debt level in the baseline projection which assumes no benefit cuts.
Lower benefits would increase the labor supply, as fewer people age 65 and older could retire. Private savings would increase out of necessity.
Benefit cuts would reduce private spending by retirees, leading to lower short-term GDP. But over the long term, GDP would be higher, as Social Security's lower impact on annual deficits would allow more government money to be spent in other areas. The risk of a fiscal crisis would be lower.
Overall, a cut in benefits would transfer wealth from older generations to younger generations, resulting directly from the benefits cuts, but also macroeconomic effects that would increase wages for workers in the long term.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
