Last week, the Congressional Budget Office (“CBO”) released a report explaining the improvements in their projections for the Social Security system published last March.
Understand that CBO is the “Dour-Dannys” of the Social Security forecasting world. Even after the improvements, they continue to own the pessimistic end of the outlook on Social Security.
CBO Sees More Work and More Wages
The change results from improved outlooks on labor participation rate and the share of earnings subject to Social Security payroll taxes. Basically, people are going to work more than we expected, and workers will get more of their paycheck in taxable cash. These positives were offset by other adjustments to economic productivity, interest rates and population factors.
In total, there was a slight improvement overall to the actuarial balance of the program. This measure represents the amount of money that we need to add to the trust funds today in order for the fund to pay full benefits over the next 75 years. Experts express the same concept in terms of GDP and Taxable Wages. In its update, the CBO explained the troubles with the program’s finances amount to 1.5 percent of the nation’s GDP rather than 1.6 percent. Alternatively this sum equates to an increase of 4.5 percent of taxable wages down from 4.7 percent.
In Other Words
In reality the expression of the cost of Social Security in terms of GDP is virtually worthless because we do not pay for Social Security out of what we produce as a nation. We pay for the system out of wages, interest, and the tax on Social Security benefits.
These figures mean that if we raise the payroll tax rate to 19.8 percent, you may consider the can to be kicked.
Versus the SSA
CBO continues to have a much more bearish outlook on the program than its trustees (all of whom are political appointees). According to CBO, the consequences of the financing gaps arrive sooner, and are substantially larger than those projected by the Trustees. In other words, CBO believes that the solution to these gaps is about 50% higher than the trustees say.
CBO attributes these differences to the assumptions in things like wages, interest rates, GDP, and demographic estimates. For those of you who want the details, read more.
Note of Interest
CBO believes that one factor will lead to the improvement of the program’s finances (taxable wages) more than the rest.
“Since last year, CBO has reexamined the historical trends in the growth in earnings inequality. In particular, data for the past few years show smaller-than-expected increases in the share of wages and salaries received by higher earners.”
This isn’t to say that high-income earners will pay themselves less. Rather, it suggests that past estimates of the differential were too high. They continue to believe that the portion of wages that are taxed will continue to fall.
This exposes a risk in the way that we look at Social Security because rising wages create a dual impact on our understanding of the problem. Rising wages bring revenue into the program. They also create a larger denominator in measuring percentages. So they tend to create a magnified solution when you look at the problem in terms of wages. If those wages do not appear, we have a much larger problem than we realize.