When trying to assess the future of the Social Security program, it’s helpful to understand two ways Social Security benefits are considered by the federal government.
Every year the Congressional Budget Office (CBO) releases its long-term projections for Social Security. It usually tracks the Social Security Trustees’ Report issued a few months earlier, and this year was no exception. According to the CBO, the combined Social Security trust funds are projected to exhaust in 2034 (one year earlier than the Trustees’ projection of 2035) after which revenues will be sufficient to pay just 77% in scheduled benefits (compared to 83% from the Trustees).
Unlike the Trustees Report, the CBO goes on to explain the difference between Scheduled Benefits and Payable Benefits. Scheduled benefits are the amounts the system is required to pay based on current benefit formulas. These formulas include indexing to the national average wage index and computation of the Average Indexed Monthly Earnings (AIME) and Primary Insurance Amounts (PIA). Scheduled benefits do not take into account the Trust Fund, or whether the money will actually be there when it’s time to pay.
Payable benefits, on the other hand, do consider whether sufficient funds will be on hand to pay out scheduled benefits. If not, as projected starting in 2034, CBO bases another set of projections on the amounts the system will actually be able to pay. The CBO, after all, is trying to get a handle on the federal budget.
Whereas the Social Security Trustees are mainly concerned with solvency—their report essentially being a plea to Congress to reform the system—the CBO is looking at the federal budget. It wants to understand federal outlays both now and in the future and how these expenditures will impact economic growth.
The Trustees and the CBO account for Social Security payments in two different ways.
The Trustees’ view
Under the Trust Fund perspective, the Trustees separate out Social Security from the rest of the federal budget. The two main sources of revenue, payroll taxes and income taxes on benefits, go into a dedicated fund from which benefits are paid out to retirees, surviving spouses, and other recipients.
In 2023 the Trust Fund took in $1.35 trillion and paid out $1.39 trillion, leaving the combined OAS and DI Trust Funds standing at $2.788 trillion. Over the next 10 years the Trust Funds will gradually be drawn down to end at zero in 2035. After that, income will be sufficient to pay about three-quarters of scheduled benefits.
In its report to Congress, the Trustees estimate that solvency could be restored by either raising payroll taxes by 3.33% to 15.73% or reducing benefits by 20.8% for all beneficiaries or 24.8% if reductions were applied only to those becoming eligible in 2024 or later.
The Trustees point out that the longer Congress waits to act, the more drastic the remedies will have to be. Other than to lay out these mathematical options, the Trustees do not get involved in solving the problem.
The CBO’s view
The CBO, on the other hand, considers Social Security as a part of the overall federal budget under the unified budget perspective. The payroll taxes and income taxes collected on benefits are not separated out, but lumped in with all the other revenues going into the U.S. Treasury along with individual and corporate income taxes and other sources of revenue.
On the payment side, Social Security is a mandatory expense comprising about a fifth of the federal budget. Benefits are deemed an obligation of the U.S. government and must be paid regardless of how or if revenues match up.
Here’s how the CBO puts it:
If the balance of a Social Security trust fund was exhausted and the fund’s expenditures continued to exceed its receipts, two federal laws would come into conflict. Under the Social Security Act, beneficiaries would remain legally entitled to full benefits. However, under the terms of the Antideficiency Act, the Social Security Administration would not have legal authority to pay those benefits on time. (That law prohibits government spending in excess of available funds.) It is unclear what specific actions the Social Security Administration would take if a trust fund was insolvent.
In its federal budget projections, the CBO considers two possibilities: 1) Scheduled benefits are paid in full (with the money coming from somewhere, possibly including borrowing by the U.S. government), and 2) Benefits are limited to dedicated funding. The impact on the federal budget is obviously different for each.
The CBO explains:
Because Social Security’s outlays are smaller in the payable-benefits scenario than in the scheduled-benefits scenario, annual budget deficits and total federal debt are also smaller. CBO’s projections incorporate the effects of government borrowing on private investment through 2054 and then hold that effect constant. As a result, the smaller deficits and debt in the payable-benefits scenario lead to faster economic growth and larger gross domestic product after the projected exhaustion of the trust funds’ balances than in the scheduled-benefits scenario.
CBO is thus opening the door to the possibility of benefit cuts and noting the positive effect upon economic growth if Social Security spending is reduced.
Consider this the counterpoint to the nearly universal objection to benefit cuts and a preview of possible arguments calling for a reduction in government spending as the federal budget deficit rises in the years ahead.
But benefit cuts don’t have to take the form of slashing everyone’s Social Security check. Most likely a combination of measures will be instituted, none of which will be too painful for any one group of people. Consider all these ways the PIA formula could be revised.
All it will take will be some tweaking here and there to bring Social Security back into actuarial balance so that scheduled benefits eventually equal payable benefits.
Further reading
CBO’s 2024 Long-Term Projections for Social Security