CBO's Long Term Projections Social Security

Sources: Congressional Budget Office, Social Security Administration, Bureau of Labor Statistics, Bureau of Economic Analysis Formore information, see the following CBO publications: CBO's 2011 Long-Term Projections for Social Security: Additional Information CBO's 2011 Long-Term Budget Outlook Social Security Policy Options CBO's SOCIAL SECURITY Long-Term Projections Finances of the U.S. Social Security System 56 milion 20% 1.6 polnts 19% percentage Immediate and Across-the-board reduction in payable benefits in the year after the exhaustion of the combined Social Security Number of people Share of total U.s. permanent payroll tax rate Increase required for the Social Security who will receive Social budget spent on Social Security benefits this Security in 201o year, equal to 1/6 of system to be solvent over the next 75 years the population trust funds in 2038 Percentage of GDP 21% in 2010 Actual Projected Outlays grows to 36% in 2035 6. People 65+ as a share of the working-age population 4 Tax Revenues 3 4.9% in 2010 2 grows to 6.1% in 2035 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085 Social Security spending as a share of GDP By 2035, the growing number of beneficiaries due to the aging of the baby-boom generation will cause scheduled spending to climb to 6.1 percent of GDP, CBO estimates. However, there is uncertainty inherent in CBOS projections; in 10 percent of the simulations, outlays in 2035 are below 5.3 percent of GDP and in 10 percent they exceed 7.3 percent f GDP. In most simulations, outlays in 2035 are projected to account for a much larger share of GDP than the share in 2010. The Worker-to-Beneficiary Ratio The number of Workers for each Social Security beneficiary fell from 4.9 in 1960 to 2.8 in 2010 CBO projects that by 2035 there wll be 1.9 workers for each Social Security beneficiary 4.9 4 3.6 3.3 3.3 3.1 2.8 2.4 1.9 1.9 1.9 1.8 1.8 1.7 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Distribution of Social Security Recipients ("Other" represents survivors of deceased workers as wellas spouses and children of retired or disabled workers.) MMMM TOTAL 54 million people Retired Workers (64%) Disabled Workers (15%) Other (21%) MMMMMMM TOTAL 91 million people Retired Workers (76%) Disabled Workers (11%) Other (12%) Federal Noninterest Spending Percentage of GDP 30 30% 28% 27% Other Noninterest 25% 25 23% 24% Spending 22% 20% 20 Medicare, Medicald, Children's Health Insurance Program, 15 and Subsidies for Health 10 Insurance Exchanges Social Security 2011 2020 2030 2040 2050 2060 2070 2080 Calculation of Social Security Benefits REAL EARNINGS High Earner (A) Earnings of Three Example Workers Inflation-Adjusted 2009 Dollars 80,000 These three graphs illustrate how 70,000 Social Security retirement benefits Middle Earner (B) are calculated. Here, three workers 60,000 earn different amounts in each 50,000 year between the ages of 25 and 40,000 64. For example, the Middle Earner has inflation-adjusted earnings that rise from about $22,000 at age Low Earner (C) 30,000 20,000 10,000 25 to about $42,000 at age 55. All three claim Social Security benefits 25 35 45 55 64 in 2010 at age 66. AGE PRIMARY INSURANCE AMOUNT (PIA) Computing the Social Security Benefit Amount 2,500 2,000 To compute benefits, a worker's past earnings are first adjusted for average wage growth in the economy. The monthly average of adjusted earnings in the 35 highest-earning years is 1,500 1,000 called the average indexed monthly earnings (AIME). A formula in the law 500 translates an AIME into a basic Social Security benefit, known as the primary insurance amount (PIA). 1,000 2,000 3,000 4,000 5,000 6,000 7,000 AVERAGE INDEXED MONTHLY EARNINGS (AIME) REPLACEMENT RATE, 2010 100% Replacement Rate 80% The progressive nature of the Social Security benefit formula means that 60% workers with higher lifetime earnings will receive Social Security benefits that replace a lower percentage of their lifetime earnings. For example, the High Earner's benefits will equal 40% 20% about 40% of his or her AIME, while 1,000 2,000 3,000 4,000 5,000 6,000 7,000 the Low Earner's benefits will equal AVERAGE INDEXED about 62% of his or her AIME. MONTHLY EARNINGS (AIME) Inflation-Adjusted 2011 Dollars 30,000 $28,000 Median Initlal Benefits 25,000 $21.000 for Retired Workers 20,000 $17,000 by 10-Year Birth Cohort (with benefits as scheduled) 15,000 10,000 5,000 1940s 1960s 1980s 2000s Legislative Timeline (OASDI- Old-Age, Survivors, and Disability Insurance) Social Security Act of 1935 Created the Social Security Program. Benefits were financed by a payroll tax on current workers - half paid by the worker and half paid by the employer. Social Security Amendments of 1939 Added benefits for spouses of retired workers and for survivors of deceased workers. 1950 OASDI recipients constituted 2% of the population Life expectancy at age 65: 13 years for men and 16 years for women 1960 OASDI recipients constituted 8% of the population LIfe expectancy at age 65: 13 years for men and 17 years for women Soclal Security Amendments of 1956 Created Disability Insurance, which expanded coverage to workers who lose earnings because of disability. Social Security Act of 1965 Established Medicare, federal health insurance for people 65 and older. 1970 OASDI recipients constituted 12% of the population Life expectancy at age 65: 14 years for men and 19 years for women Socdal Security Amendments of 1972 Created automatic cost-of-living adjustments that are tied to the inflation rate. Previously, each across-the board increase in benefits required an act of Congress. Social Security Amendments of 1977 Increased revenues by increasing the payroll tax rate, raising the amount of a worker's earnings subject to the payroll tax, and indexing that amount to growth in average wages. 1980 OASDI recipients constituted 15% of the population LIfe expectancy at age 65: 15 years for men and 19 years for women Social Security Amendments of 1983 Raised the retirement age from 65 to 67 (for workers born in 1960 or later), made some Social Security benefits subject to income taxes, and required new federal employees to participate in the program. 1990 OASDI recipients constituted 15% of the population LIfe expectancy at age 65: 16 years for men and 19 years for women 2000 OASDI recipients constituted 16% of the population LIfe expectancyat age 65: 18 years for men and 20 years for women 2010 OASDI recipients constituted 17% of the population Life expectancy at age 65: 19 years for men and 21 years forwomen For more information, see the following CBO publications: Authors: Jonathan Schwabish and Courtney Griffith Sources: Congressional Budget Office, Social Seaurity CBO's 2011 Long-Term Projections for Social Security: Additional Information Administration, Bureau of Labor Statistics, Bureau of Economic Analysis CBOS 2011 Long-Term Budget Outlook Social Security Policy Options 2035 2010