Every year, the Congressional Budget Office (CBO) releases its 30-year projection of U.S. federal deficits, debt, spending, and revenues assuming current law remains substantially unchanged. This projection can provide helpful information to individuals planning for the future. In this post, we will summarize some of the key takeaways from the 2020 CBO report released last September and potential retirement financial planning implications for our readers.
Key Takeaways from 2020 CBO Report Regarding U.S. Debt and Social Security
U.S. 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.”
According to the CBO,
“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.”
Social Security
“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.”
“If [the OAS and DI] balances were combined, the OASDI trust funds would be exhausted in calendar year 2031. 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.”
Note that the CBO uses more pessimistic assumptions in its projections than are used in the report prepared by the OASDI Trustees. For example, the 2020 OASDI Trustees’ Report (which did not reflect the impact of Covid-19), indicated the program’s 75-year actuarial deficit was 3.21% of taxable payroll (about 1.5% of taxable payroll less than the CBO 75-year actuarial deficit), and the estimated trust fund exhaustion year was 2035 rather than 2031. Both reports anticipate a significant across-the-board reduction (about 25%) in Social Security benefits in payment status at projected trust fund exhaustion if no Congressional action is taken before then.
Potential Retirement Planning Implications of CBO Report
Economic Assumptions
To develop a spending budget and plan under the Actuarial Approach, you need to make assumptions about future inflation, future investment returns and your lifetime planning period in retirement. You may choose to make different assumptions with respect to expected returns on your Floor Portfolio assets and your Upside Portfolio assets. If you are still working, you may need to make assumptions about your future compensation. The CBO projection clearly implies increased future risks during the next 30 years from:
- rising interest rates,
- rising inflation,
- more stagnant investment returns and
- increased stock market volatility
Social Security
When discussing Social Security’s financial outlook at a recent American Academy of Actuaries panel, Steve Goss, the Chief Actuary of the Social Security Administration said,
"The choice before Congress and the American people is really rather simple. We're going to have to increase the revenue by about one-third or reduce the scheduled benefits by about one-fourth, or some combination of the two."
It is important to note that a one-quarter reduction in scheduled benefits is estimated to be necessary if Congress takes no action and the Trust Fund assets become exhausted. If, however, Congress does take action, benefit reductions do not have to be applied across the board. In addition to increasing taxes somewhat on those who have yet to retire, Congress could also decide to decrease benefits only for a sub-group of the beneficiary population. Therefore, in theory, Congress could decide to reduce benefits for more wealthy beneficiaries, for example, by more than 25%.
While no-one knows what Congress will or won’t do with respect to your personal Social Security benefit in the next 10-15 years, there is a non-zero risk that your future benefits may be reduced and the reductions could be significant.
Risk Mitigation
Mitigation of the risks highlighted in the CBO report will generally involve saving more and spending less today. This may be accomplished by using more conservative assumptions when developing your spending budget and/or accumulating a larger rainy-day fund. In order to facilitate risk mitigation decisions, it may make sense to model the estimated impact on your spending budget of higher rates of inflation, possible Social Security benefit reductions and significant stock market drops in the future.
