The Congressional Budget Office now projects that Social Security's $2.8 trillion trust fund will run dry in 2029 — less than a decade before the end of the next president's first term. At that point, an automatic benefit cut of 28% would take effect.
Social Security's projected financing hole in 2030 will be at least 1.6% of GDP, or $400 billion (in 2015 dollars). The gap is so huge that addressing it can't be responsibly put off.
Hillary Clinton was reluctant to take any position on Social Security during her 2008 campaign, except to say that benefit cuts or a hike in the retirement age were off the table. But back then, the trust fund's demise was still projected to be more than 30 years away.
Yet even as a crisis draws near, Massachusetts Sen. Elizabeth Warren and other liberal Democrats have pushed for an expansion of Social Security benefits.
Republican hopefuls including Jeb Bush and Chris Christie have talked about raising the retirement age.
The CBO's report might make that a tougher sell. That's because it provided new details about a factor behind the rapidly expanding Social Security deficits: Just 81% of pay is subject to payroll taxes, with the rest above the payroll-tax ceiling, set at $118,500 this year. That's down from 90% in 1983. The CBO expects it to keep falling to 79%.
Overall, the federal government is projected to run a deficit equal to 4.9% of gross domestic product in 2030. That projection assumes that spending on defense and discretionary domestic programs will shrink by 20% relative to the size of the economy (from 9.1% of GDP to 7.2%), imposing cuts that may be politically unrealistic.
The government will spend far more in 2030 on servicing the rising public debt (3.5% of GDP) than on national defense (2.6%), CBO estimates show.
The problem is that entitlement spending will grow faster than the economy and tax revenue, fueled by an aging population, rising health care costs and expanding ObamaCare enrollment.
Autopilot On Crash Course
Social Security outlays are projected to rise by 1.2 percentage points of GDP from now to 2030, even as program revenue treads water. Meanwhile, combined spending on Medicare, Medicaid and ObamaCare exchange subsidies is seen rising by 1.6 percentage points of GDP. Add in rising debt service, and all this spending on automatic pilot is set to grow by 5 percentage points of GDP over 15 years.
But autopilot budgeting may be near a crash. When the Social Security trust fund zeros out, the program loses its authority to keep paying benefits in excess of its revenue. The trust fund is just an accounting device that gives Social Security the legal claim on all surplus revenue (plus interest) from 1984 to 2009 that the government spent for other purposes. That means the $2.8 trillion trust fund will be converted to an equal amount of public debt, plus interest, by 2029.
Social Security has two trust funds, one for disability benefits and one for retirement benefits. Because they're not allowed to intermingle funds without permission from Congress, there's been concern that the disability fund would run dry before the presidential election. But the CBO now expects it to happen in 2017.