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Future Growth of Social Security: It's Not Just Society's Aging 1 (July 2003)

handle is hein.congrec/cbo8623 and id is 1 raw text is: A series of issue summaries from the Congressional Budget Office No. 9, JULY 1, 2003 The Future Growth of Social Security: It's NotJust Society's Aging The Congressional Budget Office (CBO) projects that spending for Social Security, adjusted for inflation, will rise from $483 billion in 2003 to $2.5 trillion in 2075. Those estimates are based on CBO's 10-year baseline budget out- look and the intermediate long-range assumptions of the trustees of the Social Security system.! Approximately 55 percent of the higher spending is due to an expected increase in the number of beneficiaries, as the number of new claimants grows and as life expectancy rises (see Figure 1). The Social Security trustees estimate that the population age 65 or older will increase from 37 million today to 75 million in 2035 and to 95 million in 2075. Life expectancy for people currently age 65 is estimated to be 83 years. In 2035, it is estimated to be 85 years, and in 2075, 87 years. The remaining 45 percent of the rise in spending is due to a projected increase in the real value of Social Security ben- efit checks. Under the trustees' assumptions, the purchasing power of the average earner's benefits at retirement is ex- pected to nearly double between now and 2075. ising Benefit Levels The computation of a person's initial Social Security bene- fits is automatically linked to the general rise in wages in the economy. Under rules put into effect in 1979, benefits of newly eligible recipients are based on a formula and earnings records that are adjusted for wage growth. Those adjustments, referred to as wage-indexing, are designed to keep the ratio of initial benefits to preretirement earnings -that is, replacement rates-approximately the same from one group of new recipients to the next. Figure 1. Factors Contributing to the Rise in Social Security Spending from 2003 to 2075 Rise in R~ Value of Benefits (450) Increase in Claimants and Life Expectancy (550) Source: Congressional Budget Office. Note: Spending is calculated in constant dollars. As set forth in the Social Security Act, benefits are com- puted by applying a three-bracket formula to an average of a worker's earnings over much of his or her career.2 For a worker becoming eligible for benefits in 2003, the formula sets benefits at 90 percent of average monthly earnings up to $606; for earnings from $607 to $3,653, it uses a 32 percent rate; and for earnings above $3,653, it uses a 15 percent rate. The Commissioner of Social Security is re- quired to adjust the formula each year for newly eligible recipients by raising the bracket levels by the amount that average wages in the economy rose two years earlier. Also, a worker's earnings are indexed for average wage growth from the year in which the earnings occurred to the year in which he or she reached age 60, creating what are called average indexed monthly earnings, or AIME (earnings at 1See Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Diaility Insurance Trust Punds (March 17, 2003). 2.To calculate retirement benefits, the highest 35 years' worthlof earn- ings are used. For younger disabled workers and survivors of deceased workers, fewer years of earnings may be used.

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