The Congressional Budget Office's (CBO) analysis of Social
Security shows the program to be considerably stronger than has been
indicated in recent reports by the Social Security trustees. The new
analysis finds the program will be able to pay full scheduled benefits
until 2053 - nearly fifty years into the future - with no changes
whatsoever. This means Social Security is far sounder today than it has
been through most of its existence. In the past, shortfalls in every
decade from the forties to the eighties required frequent tax increases,
with the last series of increases ending in 1990.
The
new assessment is substantially more optimistic than the Social Security
trustees report issued in March. This report projected the program would
only be able to pay full benefits until 2042. The size of the shortfall
over the seventy-five year planning horizon is also considerably lower in
the CBO report. While the trustees report had projected the shortfall as
being equal to 0.73 percent of GDP over this period, the new CBO report
implies the shortfall will be equal to only approximately 0.37 percent of
GDP. By comparison, the recent increase in annual defense spending
associated with the wars in Afghanistan and Iraq is equal to 1.0 percent
of GDP.
The
CBO report does note the Social Security system will be paying out more
money in benefits than it receives in taxes as of 2019. This date has
absolutely no significance for the Social Security program, since it is
projected to have more than $6 trillion of government bonds in the trust
fund at the time. It can use the interest and principle from these bonds
to pay benefits until the 2053 projected depletion date. Unless the
government defaults on its debt, something that no prominent public figure
has advocated, there is no reason that the program can't rely on these
bonds. (The 2019 date also has no importance for the federal budget [see
http://www.cepr.net/sstrustees.htm].)
The
main reasons for the more optimistic picture in the CBO analysis than in
the trustees report are the assumption that the unemployment rate will be
lower and productivity growth will be closer to its long-term average,
rather than slower rate during the years of 1973-1995. The trustees report
assumes that long-term productivity growth will average just 1.6 percent
annually, slightly faster than the 1.5 percent rate during the slowdown.
By comparison, the CBO report assumes an average rate of productivity
growth of 1.9, which is closer to the 2.5 percent average over the longer
period 1947 to 2003 for which reliable data exists.
The
more rapid pace of productivity growth translates into more rapid wage
growth, which in turn leads to more rapid growth in revenue. Since
post-retirement benefits are indexed to prices, not wages, more rapid wage
growth increases the ratio of revenue to costs.
The
assumption of more rapid productivity growth is also important from the
standpoint of inter-generational equity. While the trustees' assumptions
imply that before-tax hourly wages will be nearly 50.0 percent higher in
forty years, the CBO assumptions imply that compensation will have grown
by more than 65.0 percent. This means if taxes are raised to sustain
benefit levels, future generations of workers will still enjoy far higher
standards of living than do workers at present.
This
report also clearly identifies longer life expectancies rather than the
retirement of the baby boomers as the biggest challenge to the Social
Security program. The youngest baby boomer will be age 89 at the date that
CBO projects the fund will be depleted.
The
CBO report should help counter concerns that Social Security faces any
sort of crisis. While even the trustees projections portray a far more
optimistic picture than is generally reflected in public debate on Social
Security, the CBO report indicates that the date when the program first
faces a shortfall is nearly a half century in the future. With
compensation projected to nearly double over this period, workers should
be able to sustain modest tax increases without serious
hardship |