Social Security Funds Depleted by 2033? Yes, According to CBO

The Congressional Budget Office (CBO) projects that, by 2033, the Social Security trust funds will no longer have a sufficient balance to pay full benefits to recipients unless changes are made to the program, according to the office’s report released in December. If the program continues to pay benefits as scheduled under current law, the trust funds will reach a zero balance in 2033.

The CBO projections show spending on Social Security growing from 5 percent of GDP in 2022 to 7 percent in 2096, unless benefits are adjusted, while revenues stay at approximately 4.6 percent of GDP. That means Social Security’s Old-Age and Survivors Insurance Trust Fund—which provides benefits to retired workers, their eligible dependents, and some survivors of deceased workers—would be exhausted by 2033. The Disability Insurance Trust Fund, which provides benefits to disabled workers and their dependents, would be depleted by 2048. Combining the trust funds would result in a 2033 exhaustion date, according to the CBO.

Further, if the trust funds are exhausted in 2033, benefits to Social Security recipients would have to be reduced by approximately 23 percent in 2034, compared with the current level of benefits. And they would have to be 35 percent lower by 2096, according to the CBO.

As the baby-boom generation retires in the next decade, spending for Social Security is expected to increase sharply in relation to GDP. That growth will eventually slow as baby boomers die, but spending will likely keep rising throughout the CBO’s 75-year projection period because life expectancy is expected to rise.

Meanwhile, Social Security revenues relative to GDP will remain stable, the CBO report indicates. Receipts from income taxes on Social Security benefits will see slight growth, but payroll tax revenues will decrease slightly. These trends will offset each other and keep revenues “roughly unchanged as a percentage of GDP,” the CBO report says.

The CBO estimates that Social Security’s actuarial deficit over the next 75 years is the equivalent of 1.7 percent of GDP. Based on that calculation, the federal government could maintain the necessary trust fund balances through 2096 by immediately and permanently raising payroll tax rates by about 4.9 percentage points, according to the CBO. Alternatively, the government could ensure there will be sufficient funds through 2096 by reducing benefits. Or it could employ a combination of tax increases and benefit reductions.

Payroll taxes provide the bulk of financing for the Social Security program. Employers and employees each pay 6.2 percent of earnings, up to the taxable maximum compensation of $147,000 (in 2022). The self-employed pay 12.4 percent. In 2022, payroll taxes accounted for approximately 90 percent of Social Security income. The remaining 10 percent came from interest earnings and revenue from taxation of earnings, according to the Social Security Administration.

Plans to Strengthen Social Security

While campaigning in 2020, President Joe Biden presented a four-point plan to strengthen the Social Security program, as reported by Motley Fool. The plan relies on increasing payroll taxation on high earners; increasing the special minimum benefit to 125 percent of the federal poverty level; boosting the primary insurance amount for aged beneficiaries, to account for higher late-in-life expenditures; and changing Social Security’s measure of inflation from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E) in order to more accurately track cost-of-living expenditures for the seniors leaning on Social Security payments.

Republicans have an opposing plan that features gradually increasing the full retirement age and using the Chained Consumer Price Index for tracking inflation, according to Motley Fool. With Republicans controlling the House of Representatives and Democrats controlling the Senate, which requires 60 votes to pass a bill, neither option seems likely to become law in the near future.

From: BenefitsPRO