CBO Report on Social Security

The Congressional Budget Office just released the report, "Social Security Policy Options."  Social Security outlays will exceed annual tax revenues in 2010, which is the first time since the 1983 reform.  The CBO states that if the economy recovers soon, Social Security taxes will again be sufficient to pay current expenses, but only for a few years.  By 2016, annual spending will regularly exceed tax revenues.

The CBO references the so-called Social Security "trust fund," where previous excess taxes were accumulated.  The trust fund is projected to be exhausted in 2039.  The problem, of course, is that there isn't really a trust fund.  Prior excess Social Security taxes went to pay for other government spending by purchasing U.S. Treasury debt obligations.  There is not a cash balance to draw upon as the trust fund misnomer would indicate.  To pay for program benefits in excess of Social Security taxes, the government will need to issue more debt obligations, thus increasing the national debt, or raise taxes in order to fund the redemption of Treasury securities purchased with previous Social Security surpluses.  That is one reason why this issue must be addressed now.  The other major reason is the aging of the American population who will claim benefits.  The options to address the funding shortfall can be basically categorized as lowering Social Security benefits or raising Social Security taxes, or some combination, because there isn't really 29 years worth of money on deposit in a "trust fund."

The CBO report analyzes 30 options.  The CBO proceeds under the assumption that people currently older than 55 will not be affected by any changes.  This cut-off makes it uncomfortable for people like me that are slightly younger than this age!  While the CBO did not make recommendations, options analyzed include the following:

• Increase the payroll tax rate from one to three percentage points
• Remove the upper cap on compensation subject to the payroll tax but do not increase benefits
• Lower benefits for the top 50% or 70% of earners
• Raise the full retirement age to 70
• Reduce the cost-of-living adjustments for benefits

Americans must be prepared to fund more of their retirement needs in the future.  While the Social Security program will continue to be a part of our future, the combination of benefit reductions and higher taxes will increase the need for the public to take more responsibility for their retirement income needs.  Future retirees will need to save more of their earnings for retirement during their working years while being subjected to higher taxes on those earnings.