Each year, the Congressional Budget Office publishes a report presenting its projections of what federal deficits, debt, spending, and revenues would be for the next 30 years if current laws governing taxes and spending generally did not change. This report is the latest in the series.
Deficits
Even after the effects of the 2020 coronavirus pandemic fade, deficits in coming decades are projected to be large by historical standards. In CBO’s projections, deficits increase from 5 percent of gross domestic product (GDP) in 2030 to 13 percent by 2050—larger in every year than the average deficit of 3 percent of GDP over the past 50 years.
Debt
By the end of 2020, federal debt held by the public is projected to equal 98 percent of GDP. The projected budget deficits would boost federal debt to 104 percent of GDP in 2021, to 107 percent of GDP (the highest amount in the nation’s history) in 2023, and to 195 percent of GDP by 2050.
High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.
Spending
After the effects of increased spending associated with the pandemic dissipate, spending as a percentage of GDP rises in CBO’s projections. With growing debt and higher interest rates, net spending for interest nearly quadruples in relation to the size of the economy over the long term, accounting for most of the growth in total deficits. Also increasing are spending for Social Security (mainly owing to the aging of the population) and for Medicare and the other major health care programs (because of rising health care costs per person and, to a lesser degree, the aging of the population).
Revenues
Once the effects of decreased revenues associated with the economic disruption caused by the pandemic dissipate, revenues measured as a percentage of GDP are projected to rise. After 2025, they increase in CBO’s projections largely because of scheduled changes in tax rules, including the expiration of nearly all of the changes made to individual income taxes by the 2017 tax act. After 2030, they continue to rise—but that growth does not keep pace with the growth in spending. Most of the long-term growth in revenues is attributable to the increasing share of income that is pushed into higher tax brackets.
Because future economic conditions are uncertain and budgetary outcomes are sensitive to those conditions, CBO analyzed how those outcomes would differ from its projections if productivity growth or interest rates were higher or lower than the agency expects. Even if economic conditions were more favorable than CBO currently projects, debt in 2050 would probably be much higher than it is today.
CBO now projects that debt as a percentage of GDP will be 45 percentage points higher in 2049 than the agency projected last year. Larger projected deficits in 2020 and 2021 contribute significantly to that difference. The increase in those deficits results primarily from the effects of the pandemic and actions taken to respond to it.
Social Security
Social Security is the largest single program in the federal budget. Its two components pay benefits to about 65 million people in all. The larger of the two, Old-Age and Survivors Insurance (OASI), pays benefits to retired workers, their eligible dependents, and some survivors of deceased workers. The smaller program, Disability Insurance (DI), makes payments to disabled workers and their dependents until those workers are old enough to claim full retirement benefits under OASI.
In CBO’s projections, spending for Social Security increases noticeably as a share of the economy, continuing the trend of the past five decades. The number of Social Security beneficiaries rises from about 65 million in 2020 to 96 million in 2050, and spending for the program increases from 5.3 percent of GDP to 6.3 percent over that period. Those projections reflect the assumption that Social Security will continue to pay benefits as scheduled under current law, regardless of the status of the program’s trust funds. That approach is consistent with a statutory requirement that CBO’s 10-year baseline projections incorporate the assumption that funding for such programs is adequate to make all payments required by law.
The Social Security program is funded by dedicated tax revenues from two sources. Currently, 96 percent of the funding comes from a payroll tax; the rest is collected from income taxes on Social Security benefits. Revenues from the payroll tax and the tax on benefits are credited to the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, which finance the program’s benefits. In CBO’s extended baseline projections, dedicated tax revenues for the combined trust funds remain roughly constant, equaling 4.5 percent of GDP in 2050.
A common measure of the sustainability of a program that has a trust fund and a dedicated revenue source is its estimated actuarial balance over a given period—that is, the sum of the present value of projected tax revenues and the current trust fund balance minus the sum of the present value of projected outlays and a year’s worth of benefits at the end of the period. For Social Security, that difference is traditionally expressed as a percentage of the present value of taxable payroll over 75 years.
Because the trust funds’ revenues are projected to grow more slowly than their expenditures, the Social Security program has a long-term actuarial deficit. Over the next 75 years, if current laws remained in place, the program’s actuarial deficit would be 1.6 percent of GDP, or 4.7 percent of taxable payroll, CBO projects (The 75-year projection period used here begins in calendar year 2020 and ends in calendar year 2094.) Thus, according to CBO’s projections, the federal government could pay the benefits prescribed by current law and maintain the necessary trust fund balances through 2094 if payroll taxes were raised immediately by about 4.7 percent of taxable payroll, if scheduled benefits were reduced by an equivalent amount, or if some combination of tax increases and spending reductions of equal present value was adopted.
A policy that either increased revenues or reduced outlays by the same percentage of taxable payroll each year to eliminate the 75-year shortfall would not necessarily place Social Security on a financial path that was sustainable beyond that period. Estimates of the actuarial deficit do not account for revenues or outlays after the 75-year projection period ends, and the gap between revenues and outlays would rise thereafter. Because projected shortfalls are smaller earlier in the period than they are later, such a policy would create surpluses in the next few decades but result in deficits later and would not leave the system on a sustainable financial path after calendar year 2094.
To put Social Security on a sustainable path beyond the 75th year, a policy would need to address the growing gap between revenues and outlays after that year. Even if a policy change was projected to make the system solvent for the next 75 years, it might fail to do so or might exceed its goals because of unexpected changes in demographics or in the economy. Additionally, a substantial policy change would probably have economic effects and could alter the behavior of workers and beneficiaries. Those effects, which are not included in the calculation of the actuarial balance, could cause a policy change to fall short of or exceed its stated goals.
Another commonly used measure of Social Security’s sustainability is the trust funds’ dates of exhaustion. CBO projects that under current law, the DI trust fund would be exhausted in fiscal year 2026 and the OASI trust fund would be exhausted in calendar year 2031. If their balances were combined, the OASDI trust funds would be exhausted in calendar year 2031, CBO estimates. The total reduction in annual benefits necessary for the trust funds’ outlays to match their revenues in each year after the OASDI trust funds were exhausted would be about 25 percent in 2032 and would rise to about 31 percent in 2050, in CBO’s estimation.
Summary Financial Measures for the Social Security System
Read the full publication from the CBO here.