page_title: Deficit reduction in the United States
section_title: Social Security
hierarchical_section_title: Deficit reduction in the United States / Spending or outlay proposals / Mandatory programs / Social Security
caption_attribution_description: English: CBO Report - Effect of Policy Options on Social Security - July 2010 Understanding the Chart The CBO reported in July 2010 the effects of a series of policy options on the "actuarial balance" shortfall, which over the 75 year horizon is approximately 0.6% of GDP. This is slightly different from the 0.7% estimated by the Social Security Trustees. For example, CBO estimates that raising the payroll tax by two percentage points (from 12.4% to 14.4%) would increase program revenues by 0.6% of GDP, solving the 75-year shortfall. The various impacts are summarized in the chart, taken from page XI of its report (PDF page 13). The following text is also from page XI of the report, to explain acronyms in the chart: "The actuarial balance is the present value of revenues plus the OASDI trust fund balance at the beginning of 2010, minus the present value of outlays from 2010 to 2084, minus a year’s worth of benefits as a reserve at the end of the period, expressed as a percentage of the present value of GDP over the period. The AIME for a retired worker who reaches age 62 after 1990 is calculated on the highest 35 years of earnings on which that worker paid Social Security taxes (up to the taxable maximum, $106,800 in 2010). Earnings before age 60 are indexed to compensate for inflation and for real (inflation-adjusted) growth in wages; earnings after age 59 enter the computations at nominal values. Dividing total earnings by 420 (35 years times 12 months) yields the AIME. The PIA is the monthly payment to a worker who begins receiving retirement benefits at the full retirement age or to a disabled worker who has never received a retirement benefit reduced for age. For workers who turn 62, become disabled, or die in 2010 (for calculation of survivor benefits), the PIA formula is 90 percent of the first $761 of the AIME plus 32 percent of the AIME between $761 and $4,586 plus 15 percent of the AIME over $4,586. Those percentages constitute the PIA factors. A COLA is an annual increase in benefits indexed to consumer prices. Under current law, the COLA equals the percentage increase in the CPI-W; the chained CPI-U is an alternative measure of inflation. OASDI = Old-Age, Survivors, and Disability Insurance; GDP = gross domestic product; AIME = average indexed monthly earnings; PIA = primary insurance amount; FRA = full retirement age; COLA = cost-of-living adjustment; CPI-W = consumer price index for all urban wage earners and clerical workers; chained CPI-U = chained CPI for all urban consumers; * = between -0.05 percentage points and zero." Sources CBO report is available here: CBO Report-Social Security Policy Options-July 2010
context_page_description: Deficit reduction in the United States refers to taxation, spending, and economic policy debates and proposals designed to reduce the Federal budget deficit. Government agencies including the Government Accountability Office, Congressional Budget Office, the Office of Management and Budget, and the U.S. Treasury Department have reported that the federal government is facing a series of important long-run financing challenges, mainly driven by an aging population, rising healthcare costs per person, and rising interest payments on the national debt.
  CBO reported in July 2014 that the continuation of present tax and spending policies for the long-run results in a budget trajectory that causes debt to grow faster than GDP, which is "unsustainable." Further, CBO reported that high levels of debt relative to GDP may pose significant risks to economic growth and the ability of lawmakers to respond to crises. These risks can be addressed by higher taxes, reduced spending, or combination of both.
  The U.S. reported budget surpluses in only four years between 1970-2020, during fiscal years 1998-2001, the last four years budgeted by President Bill Clinton.
context_section_description: Social Security is facing a long-run shortfall of approximately 1% GDP per year or $155 billion/year in 2012 dollars. Key reform proposals include:
  Removing the cap on the payroll tax. Income over a threshold ($110,100 in 2012) is not subject to the payroll tax, nor are additional benefits paid to those with income above this level. Removing the cap would fund the entire 75-year shortfall.
  Raising the retirement age gradually. Raising the full-benefit retirement age to 70 would fund half the 75-year shortfall.
  Reducing cost of living adjustments (COLA), which are annual payout increases to keep pace with wages. Reducing each year's COLA by 0.5% versus the current formula would fund half the shortfall over 75 years.
  Means testing for wealthier retirees, beyond taxation of benefits which is already arguably a form of means testing.
  Raising the payroll tax rate. Raising the rate by one percentage point would cover half the shortfall for 75 years. Raising the rate by two percentage points gradually over 20 years would cover the entire shortfall.
  One way to measure mandatory program risks is in terms of unfunded liabilities, the amount that would have to be set aside today such that principal and interest would cover program shortfalls (spending over tax revenue dedicated to the program). These are measured over a 75-year period and infinite horizon by the program's Trustees:
  The present value of unfunded obligations under Social Security was approximately $8.6 trillion over a 75-year forecast period (2012–2086). The estimated annual shortfall averages 2.5% of the payroll tax base or 0.9% of gross domestic product (a measure of the size of the economy). Measured over the infinite horizon, these figures are $20.5 trillion, 3.9% and 1.3%, respectively.
caption: Note: CBO estimates that policy changes with a 0.6% of GDP annual impact are sufficient to address the 75-year program shortfall. Abbreviations are explained in the chart page. Source: CBO Report-July 2010.
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