At the National Tax Association Spring Symposium, PWBM participated in a roundtable with other economic modelers. All modelers showed the results of cutting Social Security benefits by one-third in 2031. All models found that even with a benefit cut, by mid-century the U.S. still has a sizable debt-to-GDP ratio.
PWBM projects that the proposals in Fiscal Therapy by William Gale would reduce the debt to-GDP ratio from 188 percent to 17 percent in 2050 and increase long-run economic output by 7 percent.
We project that The Social Security 2100 Act would nearly eliminate Social Security’s conventional long-range imbalance while reducing the program’s dynamic short-range imbalance.
The Act reduces annual shortfalls that would otherwise add to national deficits under current policy, but at the cost of new tax distortions. The two effects nearly cancel in the macroeconomy. We project that the Act decreases GDP by 0.7 percent by 2029 and decreases GDP by 2 percent by 2049.
Previously, PWBM showed that reforms that combined tax increases with progressive benefit reductions could boost GDP by over 5 percent by 2049.
We examine a range of policy options that put Social Security on a sustainable path.
The analysis emphasizes the need for analyzing Social Security reforms using deep modeling that reveals important interactions that challenge conventional wisdom.
Tax increases generally produce more growth than “current policy” analysis where shortfalls are combined with the standard unified surplus measure. Additional debt can be combined with changes in benefits to produce even more economic growth. Reforms that combine tax increases and progressive benefit reductions produce the most growth.
Penn Wharton Budget Model’s updated Social Security Simulator allows users to build Social Security reform plans to see the budgetary and economic impact of those plans.
Users can try up to 648 different policy combinations.
The model can handle a much wider range of Social Security policy options, which are not shown to conserve space. Policymakers, major media outlets and thought leaders who want to test different Social Security reforms can contact us for estimates.
Since the major Social Security reforms were passed in 1983, Social Security Trustees have slowly reduced their projected Social Security trust fund exhaustion date from at least 2058 to 2034. Yet, Trustees’ estimates still don’t incorporate key future macroeconomic variables, including the nation’s growing debt.
Using a model that incorporates future macro-economic forces, PWBM projects that the Social Security trust fund depletes in 2032. More importantly, we project much larger future annual cash-flow shortfalls. Relative to the payroll tax base, we project a cash-flow shortfall in 2032 that is 36 percent larger than the Trustees’ estimate for that year. By 2048, our projected cash-flow shortfall is 77 percent larger.
If Social Security shortfalls continue to contribute to the federal government’s unified deficits, consistent with no changes in taxes or benefits, we project that the federal debt-to-GDP ratio will exceed 200 percent by 2048, a path that is not sustainable.
In a recent podcast and article “The White House Budget: What’s the Reality” by Knowledge@Wharton, the latest budget proposal by the White House was discussed by Kent Smetters (Wharton), Alan Auerbach (UC Berkeley), and David Kamin (NYU).
The Penn Wharton Budget Model’s Social Security Policy Simulator allows users to see the results of six policy options and combinations of those options, for a total of 4,096 policy combinations. Most policies can be simulated on a standard static basis or on a dynamic basis that includes macroeconomic feedback effects.
Relative to estimates by the Social Security Administration, the Penn Wharton Budget Model shows a faster and larger deterioration of the program’s finances. Our results are a bit closer to the Congressional Budget Office’s projections.
Many standard policy options for achieving solvency barely move the date that the Social Security Trust Fund runs out of money, but they might contribute significantly to the long-run shortfall. Either combinations of several policy changes or larger changes are required for securing Social Security.
- Workers’ performance on the job is related to all of their demographic and economic attributes, including education, age, family structure, gender, race, labor force status (full- or part-time work), peer group (birth-year), and others.
- The annual market-wide “effective labor input” depends upon the quantity (number of work hours contributed) and the efficiency (related to worker attributes) of individuals engaged in market production.
- Labor efficiency is projected to decline in the future and offset growth in labor quantity to slow growth of aggregate “effective labor input.” Official government analysts typically do not project changes in labor efficiency, thereby imparting a more optimistic outlook to budget projections.
As in many of the world’s developed nations, America is undergoing a momentous increase in the share of older individuals in the population, or “population aging.”
Population aging will continue throughout this century because of baby-boomer retirements, longer lifespans due to declining mortality, and fewer newborns from reduced fertility.
Sustained population aging will pose a significant fiscal challenge: How best to provide funding for adequately supporting older generations’ consumption and health care.
- The United States experienced an unprecedented decline in mortality during the twentieth century, thanks to improvements in public health, medical advances, and behavioral changes.
- But mortality and life expectancy improvements have been uneven across age and socioeconomic status.
- Future changes in mortality will affect the federal budget outlook. However, projections of mortality and life expectancy are highly uncertain. This uncertainty creates additional risk for the nation’s transfer programs to the elderly, which already account for half of government outlays.
- The demographic transition toward an older population is ongoing in America and Europe. The transition began earlier in Europe where fertility rates have declined much more. Will America follow in Europe’s footsteps?
- Procreation and family formation appears influenced by the social and economic conditions facing young adults. Younger American women appear to be postponing childbirth. Will this reduce future American TFR to still lower levels?
- Government policies influence the economic environment and affect fertility choices indirectly. Social Security and various retiree health programs have likely reduced fertility, making their own financing more difficult.