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Why Are CBO and SSA so Far Apart on SS2100?

Oct 23, 2019 | Social Security

Both the Social Security Administration's (SSA) chief actuary, and the Congressional Budget Office (CBO) recently released updated estimates of the effects of House Ways and Means Social Security Subcommittee Chairman John Larson's (D-CT) Social Security 2100 (SS2100) Act.* While both agree that SS2100 would improve Social Security solvency, SSA believes it will close 114 percent of the 75-year solvency gap and avoid trust fund exhaustion indefinitely, while CBO estimates it will close about 77 percent of the solvency gap and add only four years to the life of the trust fund.

The significant differences between CBO and SSA have led a number of observers to wonder why CBO views the legislation as only two-thirds as effective as SSA does. As we show, more than the entire difference can be explained by different projections of Social Security's shortfall under current policy, which CBO estimates is much larger than SSA does. CBO also estimates the SS2100 spending increases are larger than SSA, but that effect is more than offset by its larger revenue estimates. Finally, CBO's near-term estimates also incorporate non-Social Security revenue losses resulting from the bill. When we apply these effects to the long term, we estimate this would result in a net fiscal improvement of roughly 64 percent of the shortfall.

What SSA and CBO Say About SS2100

In order to examine the differences between SSA's and CBO's estimates, it's helpful to lay out the components that go into the projections and the results. On a 75-year actuarial basis, CBO estimates SS2100 would improve Social Security's finances by 3.65 percent of taxable payroll, reducing its shortfall by 77 percent. SSA estimates a smaller improvement of 3.18 percent of payroll, but this improvement is equal to 114 percent of SSA's estimated solvency gap. In the 75th year, CBO estimates the plan would leave an actuarial deficit of 1.58 percent of payroll, while SSA estimates a 0.02 percent of payroll surplus – leaving about a quarter of the 75th year shortfall under CBO and closing just over 100 percent of it under SSA. Taking into account CBO's estimate of the non-Social Security effects of the bill leaves a net fiscal improvement equal to about 64 percent of the 75-year shortfall, or 2.90 percent of payroll.

Effects of Social Security 2100 Act as Measured by CBO and SSA

Policy Percent of Payroll Percent of Shortfall Closed
CBO SSA CBO SSA
Current Law Shortfall 4.55% 2.78% 0% 0%
         
Benefit Changes +1.01% +0.82% -22% -29%
Increase First PIA Factor from 90 to 93 percent +0.27% +0.24% -7% -9%
Index Cost-of-Living Adjustments with CPI-E +0.45% +0.41% -13% -15%
Establish a Minimum Benefit at 125% of FPL +0.27% +0.15% -7% -5%
Credit Earnings Above $400,000 for Benefits +0.03% +0.02% -1% -1%
         
Tax Changes -4.10% -3.67% +90% +132%
Apply Payroll Tax to Earnings Above $400,000 -2.47% -1.94% 54% 70%
Gradually Increase the Payroll Tax Rate from 12.4 to 14.8 percent -1.90% -1.87% 42% 67%
Reduce Income Taxes on Social Security Benefits +0.27% +0.14% -6% -5%
         
Interactions -0.45% -0.32% 10% 12%
         
Change in Shortfall -3.65% -3.18% +77% +114%
Shortfall/Surplus (-) under SS2100 0.90% -0.40% 23% -14%
         
Memo: Net Fiscal Impact -2.90% N/A +64% N/A
Memo: Deficit/Surplus (-) in 75th Year 1.58% -0.02% 26% 0%

Source: CRFB calculations based on Social Security Administration and CBO data. Numbers may not add due to rounding.

We should note that since the organizations give varying levels of detail in their estimates, the above figures are our calculations based on their numbers. For example, we converted CBO's estimates from percent of Gross Domestic Product (GDP) to percent of taxable payroll to match SSA's, and we calculated SSA's interaction numbers by subtracting its total from the sum of its parts. For these and other reasons, the numbers above may be imperfect but should give a good picture of how CBO and SSA would differ on an apples-to-apples basis.

The Source of Differences Between SSA and CBO on SS2100

There are four differences between SSA and CBO that lead to their different conclusions:

Difference #1: Different Starting Points – The largest contributing factor to the difference between CBO's estimate and SSA's, by far, is that SSA projects a much smaller shortfall than CBO does under current law. Whereas SSA projects the 75-year actuarial shortfall to equal 2.78 percent of payroll, CBO projects a shortfall nearly two-thirds larger at 4.55 percent of payroll. Assuming SSA's savings numbers relative to CBO's shortfall would reduce SSA's solvency improvement by 44 percent of the shortfall – from 114 percent to 70 percent. The disparity itself is largely due to the demographic and economic factors each agency uses in its respective projections: CBO generally assumes greater improvements in life expectancy, lower fertility rates, a larger share of earnings above the taxable maximum, a smaller labor force, and lower interest rates than SSA. The models each agency uses to make projections also work differently: CBO's is largely based on demographic and economic outcomes of individuals in a microsimulation model, while SSA generally inputs assumptions into a program-specific model. Because CBO projects such a larger shortfall, it results in the necessary policies to fix it needing to be that much larger to do so.

Difference #2: Different Spending Estimates – Another element of the differing estimates is how much each policy will increase spending on benefits. CBO estimates that each proposed benefit expansion would cost more as a share of payroll than SSA estimates. Most significantly, CBO projects the proposed minimum benefit would cost nearly twice as much. In total, CBO estimates benefit expansions will cost 1.01 percent of payroll compared to SSA's 0.82 percent. This worsens the effect on Social Security's 75-year shortfall by an additional 4 percent, reducing it to about 65 percent.

Difference #3: Different Revenue Estimates – While CBO's larger benefit estimates worsen its score relative to SSA, its higher revenue estimates improve it. In particular, CBO projects that applying the 12.4 percent payroll tax to income above $400,000 (and ultimately all income) will reduce the shortfall by 2.47 percent of payroll, which is more than one-fourth higher than SSA's 1.94 percent. The difference is owed largely to CBO's belief that wage inequality will continue to grow and thus, under current law, a larger share of wages will be earned above the current taxable maximum and captured under SS2100. Including all interactions on the revenue side, revenue provisions improve solvency by about 4.6 percent of payroll in CBO's estimation compared to SSA's 4 percent. This improves the effect on Social Security's 75-year shortfall by about 12 percent, leading to CBO estimating SS2100 to close 77 percent of the shortfall.

Difference #4: Non-Social Security Effects – Though it doesn't show up within solvency estimates, CBO's estimate of SS2100 includes non-Social Security effects that SSA doesn't measure. Over the first decade, CBO estimates that payroll tax increases that raise nearly $1.7 trillion for Social Security will end up losing $316 billion in other revenue. The main reason is that employers will respond to higher payroll taxes by reducing wages and thus taxable income, leading to less income tax revenue. As a result of all of these changes, Social Security's finances would improve by $841 billion from 2020-2029, but the rest of the budget would be $316 billion worse off – resulting in net deficit reduction of $525 billion. And though CBO does not provide unified budget projections over the long term, we estimate that if incorporated, they would reduce the net fiscal improvement to the equivalent of 64 percent of Social Security's 75-year shortfall.

***

Under any set of projections, SS2100 will improve Social Security's solvency and reduce projected debt levels, particularly over the long term. However, different estimates can result in very different conclusions about how large that improvement will be.

Uncertainty about Social Security's shortfall and the effects of reform is one reason policymakers should pursue robust sustainable solvency, where adjustments automatically reflect the program's financial needs. For example, Chairman Larson could consider delaying proposed benefit expansions and tax reductions until surpluses emerge and/or allowing the payroll tax rate to rise in any year the Social Security Trustees do not project 75-year solvency.

We continue to commend Chairman Larson for pushing solutions to address Social Security solvency and encourage others to come to the table to hash out a permanent solution that avoids trust fund exhaustion, improves our long-term fiscal picture, and promotes economic growth.


*After CBO released an initial estimate, Chairman Larson submitted a modified version to CBO reflecting a change in the legislation's intent. In the original version, CBO interpreted all taxation of Social Security benefits would be devoted solely to the Social Security trust fund instead of the current-law method of the revenue being split between Social Security and the Medicare Hospital Insurance (HI) trust fund. This modified version instead transfers the revenue that would have gone to the HI trust fund from the Social Security trust fund, leaving the HI trust fund no worse off but not helping solvency as much as the original legislation would have.