CBO Releases 2014 Long Term Budget Outlook
-
2014 Long Term Budget Outlook (pdf 64pp)
While we are still waiting on the 2014 Social Security Report we do have today the release of CBO’s annual Budget Outlook which among other parts does include a chapter on Social Security. I plan to extract and post some Tables from it but in the meantime people can have their own look and draw their own conclusions. Key pieces:
p. 10 Table 1-1. Projected Spending and Revenues in Selected Years Under CBO’s Extended Baseline
Note that under CBO’s 10 year window (the one used to score legislation) non-interest spending is projected to drop from 19.1% of GDP to 18.8%. Or essentially flat, and BTW this includes spending on Social Security and Medicare. On the other hand TOTAL spending INCLUDING interest is projected to increase from 20.4% to 22.1%. With the entire difference being made up by interest payments rising from 1.3% of GDP to 3.3%. I for one would be interested in seeing and discussing the interest rate assumptions that go into that increase, perhaps it just represents some reversion of 10 year Bond Rates to the mean. Please chime in in comments.
p. 25-44 Chapter 2: The Long-Term Outlook for Major Federal Health Care Programs
Lots and lots of good stuff here. I haven’t even started sampling yet. Bon appetit!
p. 45-51 Chapter 3: The Long-Term Outlook for Social Security
Ditto. And my first stop at this particular buffet table, with reports in the next hours or days. My first focus might well be on: Table 3-1. Financial Measures for Social Security Under CBO’s Extended Baseline on p. 50. Note that while the main text does highlight the need for an “immediate and permanent increase of 4.0%” this is based on the assumption that despite all the uncertainties in the projections that we need to address the 75 year actuarial gap in one gulp. But an inspection of Table 3-1 shows that the actuarial gap for the first twenty five years is just 2.1% of payroll or 0.7% of GDP. Which might suggest to some that an plan to address the first 25 years IN the first 25 years by implementing something like the Northwest Plan’s phased in FICA increases while putting in contingency plans for actions in the decades that follow that might be more reasonable and prudent than trying to pre-fund a retirement insurance reserve 75 years in advance.
But let me turn this over to you all.
Bruce
it would take me about two days with my old slow computer to download 64pp. Is there anything in there that could form the basis of a spread sheet like the one i did for the Trustees Report?
Not really, CBO doesn’t explicitly reveal its assumptions in the way the OACT Tables do. But I will work on getting them up on Angry Bear.
And PDFs are not the behemoths they used to be when they were mostly just big graphics of each page. That is even on the slowest connection you would be talking minutes and not days. But I will try to get the good bits up in condensed form.
There is quite a bit of discussion of re-evaluation of long-term real interest rates, which led to estimates that they would be 0.5% lower than estimated last year. I think this was the main reason for the increase in the Social Security actuarial gap (and the movement of the OASDI combined Trust Fund depletion to 2030). But in the short term, I think they just say that they projected that interest rates would rise from the current extraordinarily low values in the next few years to their new long-term values (2.5% real).
I don’t have a lot of confidence in these estimates, based on their explanations (such as slower growth of the workforce leading to more capital per worker and therefore lower return on capital and lower interest rates; or using 1990-2007 as the interest-rate baseline because the 1970s had high inflation and so low real interest rates, the 1980s had a sharp drop in inflation and so high real interest rates, and of course 2008 to now have really low rates – so most years are abnormal).
Looking at their summary of past projections also inspires little confidence, and were sometimes surprising. Of course, the 2007 projections were way off because of the 2008 crash. But the 1996 estimates were also way off (projecting bigger deficits and debt than are now projected). So I think 75 year projections just cannot be done, and should not be the basis of any policy changes.
From the CBO Reprt:
What Choices Do Policymakers Have?
The unsustainable nature of the federal tax and spending policies specified in current law presents lawmakers and the public with difficult choices. Unless substantial changes are made to the major health care programs and Social Security, spending for those programs will equal a much larger percentage of GDP in the future than it has in the past. At the same time, under current law, spending for all other federal benefits and services would be on track to make up a smaller percentage of GDP by 2024 than at any point in more than 70 years. Federal revenues would also represent a larger percentage of GDP in the future than they have, on average, in the past few decades. Even so, spending would soon start to outpace revenues by increasing amounts (relative to GDP), generating rising budget deficits. As a result, federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful.
This demonstrates a cognitive blockage suffered by CBO which they seem to have caught by spending too much time in closed rooms with representatives of the P.Peterson foundation.
Note.. they begin by mentioning Social Security by name and suggest that it’s becoming a larger percentage of GDP in the future than it was in the past is some kind of policy failure. They don’t connect with the idea that if people are going to be living longer they are going to become a “larger percentage of GDP” whatever government policies are.. It’s like having another kid and bewailing the fact that feeding the kids is going to become a larger percentage of your budget than it was in the past.
But worse… they conclude with “federal debt held by the public is projected to grow faster than the economy…” They don’t connect with the fact that Social Security has nothing at all to do with the “debt held by the public.” Nothing.
So, according to CBO, the United States government can never adjust it’s spending priorities to reflect changes in the world over seventy five years. And a program which has nothing to do with debt held by the public is singled out by name in a paragraph about rising debt held by the public. I wouldn’t want CBO to be doing my accounting.
So, try this: Social Security has always been paid for by the people who get the benefits. It has nothing to do with the Federal Budget at all (pace Bruce). If the people who will need the increased benefits (because they are going to be living longer) will adjust their own budgets by shifting a small percent from “spend today” to “save for old age” (through the Social Security program), Social Security ceases to be a factor in “federal spending” much less the “budget deficit.”
I think CBO has fallen into the hands of the enemy. Using hysteria about “the debt” as an excuse to cut Social Security which has nothing to do with the debt.
And using reasoning that would get you an F in fourth grade arithmetic (word problems).
if you look at the chart (near the end of the report… sorry it fell off my computer when i dialed up AB… i’ll get back with the exact page etc)
that shows expenses as a percent of GDP you should notice that SS starts at 4% today and rises to 6% by about 2030… and then stays essentially dead flat essentially forever. so the huge increase in SS is NOT some exponentially increasing unpayable debt that is going to kill us. it is a modest… 2% of GDP to reflect the fact that people will be living longer and more of their (“our”) budget will need to be devoted to older vs younger than in the past. but the process does not go on forever, it flattens out by 2030 and stays stable at an entirely affordable level… 6% of gdp. the only way that figure could bother you is that you don’t think old people should be allowed to eat. please note that the cost of groceries and housing for old people is going to be about 6% of gdp whether it is paid for by SS or by stocks and bonds.
from the horse’s mouth
Although rising real income would contribute to rising
average tax rates under current law, that real income
growth would also mean that households in the future
would have higher after-tax income than similar house-
holds at the same point in the income distribution have
today. For example, from 2014 to 2039, real after-tax
income for a couple earning the median income is pro-
jected to grow by about 40 percent under the extended
baseline.
this is from the CBO report. note that while CBO says your SS may “cost” you (you get it back) an extra four percent of your income (assuming you pay “both” shares), your AFTER TAX income will be 40% larger than today’s.
to make this clear, if you have an after tax income today of 100k, by 2039 you will have an after tax income of 140k. out of which you might have to pay about an extra 5.6k to Social Security to pay for your future longer retirement at higher benefits (a benefit check about 45% of your average working wage… in real dollars… for twenty years or more.)
poor you. imagine having to pay more money just to live longer without working. and only having 34 thousand dollars more after taxes than you have today.
the graph showing the flattening of the growth of SS costs is on page 127 of the Report, Figure D-1, second graph “components of total spending”.
and the answer to Krasting is, “No, I can’t build a spreadsheet off this information.
I can suggest, based on other calculations that it is very likely that raising the payroll tax one tenth of one percent, each, at a time… call it 2 tenths of a percent combined, over 24 years, rasing the tax a total of 4.8% would catch up with the CBO’s “4% immediate and permanent”. The extra 8 tenths of a percent in the tax rate is not quite what you think. The CBO’s immediate tax raise, before it is needed, would build a trust fund that would draw interest from the general budget that would supplement the tax when the tax was actually needed… essentially hiding the extra 0.8% that the gradual increase shows.. and getting it from the pocket of the general taxpayer instead of the future beneficiary of SS.
moreover while CBO is taxing you 4%, the gradual approach would only be taxing you a tenth of a percent, then two tenths of a percent, then… and so on, so that by the time it catches up with CBO’s 4% you AVERAGE tax increase would only be 2%.. of which you would only see half.. or 1%.
moreover, the gradual approach to the slightly higher tax rate would pay for Social Security in the years beyond the 75 year actuarial window, about which CBO can only say ominously that they would require “further significant tax increases.” well, we are not so ominous, we tell you exactly how much is “further” and how much is “significant.”
and i keep insisting that since you get the money back with interest in the form of a guaranteed pension that will be more comfortable than todays and last longer because you are going to be living longer, you’d be a damn fool to complain about the “higher cost of Social Security..”
You can live on 4% less than what you have today without noticing any difference in your lifestyle. You can live on 4% less than the 40% MORE you will have by the time the tax is needed… with a very noticeable POSITIVE difference in your life style. including the style of knowing your retirement is guaranteed at least to the level of “enough.”
Coberly – The CBO has the end date for the SSTFs as 2030. That is 15 years from now. You think you can have a .2% rise for the next 24 years, but you miss that the TF will run out before the 24th year is reached.
Remember that to be solvent, the TF must = the next year’s payout. In 2025 benefits will be $1.7T. I don’t believe you can fill this bucket and stay solvent with the .2% annual approach. But I’d love to see a spread sheet that says you can.
To get over the Boomer hump you have to have an I&P of 2.1%. No phase in allowed. And even with that the system is facing a pre-programed problem for the next generation to deal with. How are you going to sell this to younger workers? They pay in for another 25 years so the Boomers get paid, and when the Boomers are gone the next generation is looking at cuts/and more taxes? Tough sale….
The 75 year solvency objective is no longer realizable. There is no political will for a 4% I&P. That is – in present dollars – $238B. Way too big a tax increase.
I don’t think that the 2.1% I&P is ‘sell-able’ either. Look what’s happening to the Highway Trust Fund. That’s peanuts compare to these big numbers.
Krasting
if you are increasing the tax at .2% per year the Trust Fund does NOT run out. read the goddamn spread sheet you asked me to send you.
you understand nothing, and it doesn’t help to try to explain to you. you just keep coming back.
oh hell, just one more time
when you raise the tax two tents percent per year, by fiteen years you will have raised it three percent. that WILL have pushed back the depletion date of the trust fund.
krasting doesn’t think achilles can catch the tortise because he can’t wrap his mind around a moving target. he’s like some kid who signed up for freshman calculus without ever having been able to pass high school algebra.
without seeing the exact year by year numbers that CBO uses for projected revenue and projected costs and projected interest rates i can’t give an exact “answer” to when and at what rate the gradual approach will solve the problem. but krasting has certainly seen the spread sheet that solved it exactly for the Trustees Report last year, and he has seen the other calculations that showed “in prinicipal” how the gradual approach equals the “immediate and permanent” approach after about twenty two years (for the last CBO estimate) but he didn’t learn a damn thing about how it works.
let me say, without proof, that if two tenths in twenty years won’t do the job, two and a half tenths in twenty years, or twenty two years will. and the final cost will be about what i have described here and elsewhere on this blog…. about a four thousand dollar a year increase in the cost of Social Security to cover your longer life expectancy under the terrible economy predicted by CBO out of an income that will be forty thousand dollars higher *after taxes” than it is today. I don’t see that as an unfair, unreasonable, crushing burden.
and the only “appetite” for a tax increase that counts is Congress’s, and they seem to be bought and paid for by the Petersons. So maybe at the end of the day Krasting will be right, but not because he is right about any of the facts or sanity involved.
You, dear reader, COULD change congress’s mind by making it clear to them that you’d be willing to pay the tax increase especially if it was introduced gradually.
In Sept 2012 NASI (National Academy of Social Insurance) commissioned polling to score a variety of Social Security policy options and published the results in his report:http://www.nasi.org/sites/default/files/research/What_Do_Americans_Want.pdf
Social Security: What do Americans Want.
In it they put forth 12 different policy options with some variations (Table 6, pg. 13) and then tested them individually and in combinations. People can review the numbers but in summary they were: tax increases yes, benefit cuts no, even when those tax increases were across the board.
The package that polled the best had these four components:
• Eliminate the cap over 10 years so that 100% of earnings are taxed
• Over 20 years, raise the tax rate by 1/20th of 1% per year for
employees and employers
• Raise the minimum Social Security benefit
• Increase the COLA by basing it on inflation for the elderly month for all beneficiaries (CPI-U-E)
Bullet point two is basically Northwest Plan Lite, which in this package does about half the heavy lifting. There are lots and lots of Tables and details in this Report and I urge people to at least skim it. But the bottom line conclusion is abundantly clear:
If given the choice the American people would grab at a tax increase based fix over any package of benefit cuts. By large numbers and across generations, incomes and parties – see Table 5.
Table 5. Views on Paying More to Preserve Social Security
by Generation, Family Income and Party Affiliation
(Percent Agreeing)
It is critical that we preserve Social Security even if
it means increasing Social Security taxes paid by…
Working Americans Wealthy Americans
Respondent Characteristics
Total 82% 87%
Generation
Silent 90 87
Baby Boomer 84 88
Generation X 80 87
Generation Y 77 84
Family Income
Less than $30,000 78 88
$30,000 to $49,999 85 88
$50,000 to $74,999 83 86
$75,000 to $99,999 82 85
$100,000 or more 82 82
Party Affiliation
Republican 74 71
Democrat 88 97
Independent 83 86
I don’t know whether this extract will format in a readable form but buried in what may be a jumble of numbers is this:
71% of Republicans favor taxing the wealthy to fund Social Security
82% of $100,000/yr earners agree.
And as you would expect those are the LOWEST numbers, every other sub-group put it higher. This is why the Peterson folks NEVER test plans remotely similar to Northwest.
I will try to get a front page post with this Table and some others properly formatted since the Commenting system mostly doesn’t allow it without doing some straight out HTML coding.
Coberly – the spread sheet you sent me was based on the assumption that a 2.6% I&P was an alternative to achieve actuarial balance. But now the I&P number is 4%. That’s a 50% increase. So the spread sheet you sent is no longer valid.
Like I said, I’d be interested to see what your new spread sheet will say, but I don’t think it will work. A 4% I&P is a very big hill to climb. It’s like what Kotlicoff told you – you’ll never catch up to a 4% I&P with a .2% annual increase.
Krasting
Kotlikoff eventually admitted I was right about the gradual catching up with the “immediate”. Then he changed his argument to “people will never accept a 16% tax for Social Security.
I tried to show in my post today that they would be stupid not to.
That 16% is a 4% increase over what they pay today. Or about 2000 dollars a year out of a 50k income. Incomes are projected to grow faster than the needed tax increase so that people will have MORE after tax money as time goes on, not less.
Moreover they will get that 2000 dollars back with interest when they need it most.. .to pay for rent and groceries after they can no longer work.
They’d have to save an extra 2000 a year or more to be able to retire even if there was no Social Security. What Social Security does is protect their savings from inflation and market losses and their own chances of disability, death, and even failure to make enough to save enough.
You, Krasting, have shown you don’t understand the numbers, don’t understand even simple logic, and don’t get the point at all about what Social Security does.
May I repeat what Bruce Webb said here, in my own words:
It is insane to “pre fund” a retirement program ten years before the people who will retire “then” have been born.
CBO gets away with this because someone some time ago thought it would be smart to calculate the “actuarial solvency” of Social Security over 75 years… and that turned into “omigod” Social Security is going broke. Even SS does not actually bother to guess what will happen in 75 years. They pretty much just assume everything will stay the same for the fifty or sixty of the 75 years that they can’t make even an “educated guess” about.
But CBO wants you to panic because the cost of paying for 75 years of SS would (actually “could”) require a 3.5% increase in the “tax.”
I have tried to show that even that increase should not scare you… it’s money you will get back that you have to pay (save) anyway. And SS gives the best guarantee it will still be there when you need it (plus interest) of any savings plan… guarantee that is unless you let the Congress “fix” it before it’s broke.
But the actual cost of SS for anyone currently working is likely to be a gradual increase… of about one tenth of one percent per year for twenty of the next forty years… or a 2% increase overall… for an average increase of 1%… spread over that twenty or forty years.
You would never know it had increased if the Peterson foundation wasn’t paying people to shout it in your ear every time you turned around, and insinuate that it is only going to get worse and worse until you are staggering under the weight of long dead grandmothers.
oh, yes, i forgot to repeat again
while that tax rate is climbing, wages will be increasing at a rate over ten times as fast. So you will be getting richer after taxes, not poorer.
As much as twice as rich AFTER taxes as you are today.
And that’s assuming a rate of wage increase far below that of the history of wage increases for the last seventy years.