Social Security’s Long-Term Budget Outlook

near-term outlook is benign, population aging in the United States will eventu-ally increase program costs much faster than revenues. The trust funds will begin to decline and, under most plausible forecasts, will fall to zero well before the middle of the next century. The paper offers an overview of the budget outlook for Social Security. It contains a review of the factors that influence program finances and an assessment of how these factors affect the future outlook. It considers voters’ willingness to deal with the problem and surveys the possible reforms that would eliminate the long-term deficit. Social Security is the largest item in the federal budget. After the income tax, the program also provides the most important source of federal tax rev-enues. In fact, because Social Security taxes exceed benefit payments and administrative costs, the program’s surplus revenues are lent to the Treasury to help finance other government spending. Informed observers generally agree on the near-term prospects for Social Security. Over the next 10 to 15 years, the outlook is fairly benign, even under pessimistic assumptions about the state of the economy. The program will continue to collect more payroll tax revenue than needed to finance benefit payments. Growing surpluses will be lent to the Treasury, where they will earn the rate of return payable on govern-ment debt sold to the public. The reserves of the system, which are held in trust funds, will increase by between $70 and $150 billion a year, providing the program with an ample contingency fund even in the event of a lengthy recession. When the baby-boom generation reaches retirement age in the second decade of the next century, however, benefit payments will begin to climb much faster than expected tax revenue. Outlays will exceed taxes and will eventually exceed tax revenues plus interest payments earned by the trust funds. Under the intermediate and pessimistic assumptions of the Social Security Trustees, the trust funds will begin to shrink. Unless benefits are trimmed or tax rates increased, the trus