The Congressional Budget Office is projecting that the Social Security Trust Fund for seniors will be depleted in 2031, three years earlier than the fund’s trustees had projected in May and one year earlier than the CBO had projected last year.
After funds are depleted, benefits will continue because they are also financed by payroll taxes, but they will decline unless changes are implemented to build up the trust fund’s reserves.
The CBO is also projecting that Medicare’s Hospital Insurance Trust Fund will be depleted in 2024, two years earlier than the fund’s trustees and the CBO had projected earlier this year, and that the Social Security Disability Insurance trust fund will be depleted in 2026.
Over the 10 years ended in 2030, the CBO is projecting a cumulative deficit for these trust funds plus the Highway Trust Fund of $2.3 trillion, 6% larger than the $2.2 trillion it had estimated in January.
If President Donald Trump is re-elected and ends payroll deductions for Social Security and Medicare, as he has threatened to do, both programs would not just reduce their benefits but also end them unless some other source of funding were implemented.
Debt vs. GDP
In a second report released Wednesday, the CBO projects that for the first time since 1946 total federal debt in 2020 will almost equal the nation’s total economic output. In 2021, the debt burden is expected to exceed the annual GDP level.
The CBO projects that debt held by the public will reach $21.9 trillion in the fiscal year ending September 2021, will be equivalent to 104.4% of gross domestic product, up from 98.2% in this fiscal year, which ends on Sept. 30. By the end of 2030, the U.S. debt is estimated to increase to $33.5 trillion, equivalent to 109% of GDP.
As for the annual deficit, the CBO estimates it will reach $3.3 trillion this fiscal year, or about 16% of GDP if current policies remain unchanged, producing the largest shortfall relative to the size of the economy since 1945.
“The outlook for the 2020 budget deficit has deteriorated significantly” due to the economic disruption caused by coronavirus pandemic, according to the CBO report. It’s also projecting that “deficits throughout the next decade would be larger as a percentage of GDP than their average over the past 50 years.”
The increasing deficit and debt levels coupled with the accelerated depletion of the Social Security and Medicare trust funds pose tough challenges for policymakers.
“We (as a country) have to do one of two things: 1. cut benefits 2. raise more money (this means raising taxes),” says David Blanchett, head of retirement research for Morningstar’s Investment Management group.
“I think it’s likely that we’re going to have to do a combination of both at some point, the question is whose benefits get cut and who gets taxed?”
His guess is that younger Americans could see “notable reductions in Social Security retirement benefits and wealthier Americans could be taxed more to improve the funded status of these plans.”
— Check out Don’t Claim Social Security Early on Fear of Benefit Cuts on ThinkAdvisor.