STATEMENT OF. Alice M. Rivlin Director Congressional Budget Office

Transcription

1 STATEMENT OF Alice M. Rivlin Directr Cngressinal Budget Office befre the Special Cmmittee n Aging United States Senate June 16, 1981

2 Mr. Chairman: I am pleased t appear befre this Cmmittee t discuss shrt-term Scial Security financing. In my remarks, I will address tw majr issues: Current prjectins f the financial status f the Scial Security trust funds; and Shrt-run ptins t remedy the situatin. CURRENT PROJECTIONS OF THE TRUST FUND BALANCES Based n the set f ecnmic assumptins adpted by the Cngress in the First Cncurrent Reslutin n the Budget fr Fiscal Year 1982, the Cngressinal Budget Office prjects that at the start f fiscal year 1983 the balance in the Old Age and Survivrs Insurance (OAS!) fund--the largest f the three trust funds that finance the Scial Security system--will fall t 9.2 percent f the estimated $157 billin in utlays fr that year (see Table 1). Apprximately $1 billin will remain in the OASI fund by the end f that year; in the absence f legislative actin, it will be depleted shrtly thereafter. The Disability Insurance (DI) trust fund, hwever, is prjected t imprve its psitin substantially thrugh 1986, with reserves increasing t 132 percent f utlays, while the Hspital Insurance (HI) fund's balance is prjected t grw t ver 80 percent f annual utlays ver the perid. Althugh the prblem with the OASI trust fund is serius, there is n questin that actin by the Cngress will guarantee the cntinued payment f benefits n time t Scial Security recipients.

3 TABLE 1. PROJECTIONS OF SOCIAL SECURITY TRUST FUND OUTLAYS, INCOMES, AND BALANCES, TO FISCAL YEAR 1986 (In billins f dllars) Old Age and Survivrs Insurance Outlays Incme ~/ Year-End Balance Start-f-Year Balance (as Percent f Outlays) S Disability Insurance Outlays Incme ~/ Y ear-end Balance Start-f-Year Balance (as Percent f Outlays) Hspital Insurance Outlays Incme ~/ Y ear-end Balance Start -0 f -Year Balance (as Percent f Outlays) Cmbined OASl, Dr, and HI Outlays Incme ~/ Year-End Balance Start-f-Year Balance (as Percent f Outlays) SOURCE: Based n ecnmic assumptins underlying the First Cncurrent Reslutin n the Budget fr Fiscal Year NOTE: Minus sign dentes a deficit. IJ:/ Incme t the trust funds is budget authrity. It includes payrll tax receipts, interest n balances, and certain general fund transfers. 2

4 The Nature f the Trust Funds Timing differences between revenue inflws and utlays fr benefits require that trust fund balances at the start f each fiscal year be at least 9 t 12 percent f that year's anticipated utlays. Of the three funds, nly the OAS! fund is expected t experience a cash flw prblem in the next five years, when its balance at the beginning f fiscal year 1983 drps belw the 9 percent level f expected utlays. Maintaining a trust fund balance at a minimum level f 9 percent f annual utlays shuld mean that at the start f any mnth during the year there will be a balance sufficient t meet that mnth's expenditures. This 9 percent is an abslute minimum, but nt a desirable level at which t maintain the funds. My statement tday will fcus mstly n the ptins that are available t ensure that the trust fund balances are maintained at this 9 percent level f utlays. Sensitivity t Ecnmic Cnditins The OASI fund's current difficulties result primarily frm Scial Security's sensitivity t the ecnmy. Trust fund revenues are primarily a functin f aggregate earnings. When unemplyment rises and earnings grw mre slwly than expected, revenues fall belw prjected levels. Fr example, a sustained ne percent rise in the unemplyment rate ver three years can diminish all three trust funds' balances by as much as $15 billin. At the same time, benefit payments are sensitive t price level changes, because benefit amunts are indexed annually t changes in the Cnsumer Price Index (CPl). When inflatin rates are high, benefit payments grw 3

5 sharply. The recent cmbinatin f high inflatin, relatively high unemplyment rates, and lw rates f grwth in real earnings has led t the deteriratin in the trust fund balances. Nearly fur years ag, in respnse t similar ecnmic circumstances, the Cngress passed the 1977 Scial Security Amendments. These amendments were thught t be sufficient t maintain the trust funds fr the ensuing 30 years. The unfreseen recurrence f these adverse ecnmic cnditins means that the Cngress again needs t take sme actin. The current prjectins, shwn in Table 1, are based n the ecnmic assumptins underlying the First Cncurrent Reslutin: that the rate f inflatin will fall t 6.2 percent by 1983 and 4.2 percent by 1986, and that the unemplyment rate will fall t 5.6 percent by the end f 1986 (Table 2). These assumptins are similar t thse f the Administratin. Like any ecnmic frecast, they are uncertain and grw increasingly s as they g further int the future. Fr this reasn, it is frequently asked what effect a different set f ecnmic assumptins wuld have n the trust fund prjectins. CBO has cnstructed a set f internally cnsistent alternative assumptins fr its analysis f the Administratin's 1982 budget request. Under these assumptins (als shwn in Table 2), the inflatin rate declines, but nt by as much as under the ecnmic assumptins f the First Reslutin, reaching 8.9 percent in 1983 and 7.1 percent by The unemplyment rate falls t 7.2 percent by

6 TABLE 2. ALTERNATIVE ECONOMIC ASSUMPTIONS, BY CALENDAR YEAR Real GNP (Percent Change, Year Over Year) First Reslutin Alternative cpr (Percent Change, Year Over Year) First Reslutin Alternative June Scial Security Benefit Increase (Percent) First Reslutin Alternative Unemplyment Rate (Percent, Annual Average) First Reslutin Alternative Table 3 cmpares the status f the three Scial Security trust funds under these alternative ecnmic assumptins with thse used in the First Reslutin. The OASI trust fund will encunter cash flw prblems befre the end f fiscal year 1982 under the alternative set f assumptins, and will becme depleted by the end f fiscal year The DI and HI funds remain strng, hwever, under this path. Bth f these sets f ecnmic assumptins frecast real ecnmic grwth in each year ver the five-year perid; n further dwnturns in the business cycle are frecast. Yet, even with the ecnmy grwing at nly 5

7 slightly different rates, the difference between the ecnmic assumptins results in a difference in the estimated cmbined OASl, DI, and HI trust funds' balances f $60 billin by the end f If real grwth shuld cntinue at the levels that have ccurred ver the mst recent past instead f at the higher levels prjected under bth sets f ecnmic assumptins, the prblem in the trust funds wuld wrsen. TABLE 3. COMPARISON OF OASI, DI, AND HI TRUST FUND BALANCES AS A PERCENT OF OUTLAYS AT START OF YEAR UNDER FIRST RESOLUTION AND ALTERN A TIVE ECONOMIC ASSUMPTIONS, BY FISCAL YEAR OASI First Reslutin Alternative Dl First Reslutin Alternative HI First Reslutin Alternative SHORT-RUN OPTIONS The Cngress has a variety f actins it culd take t guarantee the adequacy f the trust funds. These ptins fall int three brad categries: Changing the trust funds' accunting methds, Mdifying benefit amunts, and lncreasing r finding alternatives t the payrll tax revenues tha t finance the syste m. (3

8 Many f these ptins have already been cnsidered by the Senate Finance and Huse Ways and Means Cmmittees in their submissins t the Budget Cmmittees fr the 1981 recnciliatin bill, r in ther bills, r have been suggested by the Administratin. Accunting Changes I wuld first like t discuss three pssible accunting changes: Interfund brrwing amng Scial Security's three trust funds, Realigning the payrll tax rates amng the funds, and Merging the three funds. Neither benefit amunts nr the scheduled payrll tax rates wuld be affected by enacting any f these three accunting ptins. The first tw f these three accunting ptins are implicit in the Administratin's plan fr Scial Security, and are spelled ut in detail in the current financing bill befre the Scial Security Subcmmittee f Ways and Means (H.R. 3207). TABLE 4. CBO PROJECTIONS OF OASI, Dl, AND HI AGGREGATE TRUST FUND BALANCES AT START OF YEAR, AS A PERCENT OF OUTLAYS UNDER ALTERNATIVE ECONOMIC ASSUMPTIONS, TO FISCAL YEAR 1986 Trust Fund OASl and Dl First Reslutin Alternative OASI, Dl, and HI First Reslutin Alternative

9 Interfund Brrwing. Under bth sets f ecnmic prjectins, if the OASI fund brrwed nly frm the DI trust fund, OASI reserves wuld be adequate fr anther three t six mnths. After this time, further brrwing wuld have t cme frm the HI trust fund. The needed OAS! brrwing wuld amunt t $39 billin ver the 1981 t 1986 perid under the First Reslutin assumptins, and $66 billin based n the alternative assumptins. This amunt f brrwing can be supprted by the DI and HI funds under the frmer path, but $6 billin in additinal incme r benefit reductins wuld be needed by fiscal year 1985 t minimally meet the system's needs under the latter path. Realignment f Payrll Taxes r Merging the Trust Funds. Similar results culd be achieved by realigning the way the payrll tax is apprtined amng the three trust funds r by merging the funds int ne new fund. The 96th Cngress enacted a realignment measure fr fiscal year 1981 (Public Law ) with the aim f giving this Cngress time t examine Scial Security issues in greater detail. Merging all three trust funds int ne new fund culd lead t sme lss f Cngressinal cntrl in mnitring the status f the three prgrams. Maintaining a separate accunting system fr each prgram culd ffset this disadvantage, hwever. Benefit Changes An alternative way f easing the cash flw prblem wuld alter benefits. Sme chices in this categry wuld invlve mdifying the way annual cst-f-living benefit increases are calculated. Other alternatives, invlving selective benefit reductins, have been reprted by the Senate Finance and by the Huse Ways and Means Cmmittees in their 8

10 recnciliatin packages sent t the Budget Cmmittees. If these packages becme law, the trust funds, with interfund brrwing r the realignment f the payrll tax rate, shuld be able t meet cash benefit payments withut further actin ver the next five years under either set f ecnmic assumptins. Mdifying the Annual Cst-f-Living Benefit Increase. T keep Scial Security benefits abreast f inflatin, they are autmatically indexed annually t reflect rises in the CPL These adjustments are cstly; the increase in benefits resulting frm the autmatic indexing prvisin will add $3.5 billin t expenditures in fiscal year 1981, apprximately $18 billin in fiscal year 1982, and a ttal f between $217 billin and $258 billin ver the 1981 t 1986 perid. There are a number f ratinales fr mdifying the way benefits are adjusted fr inflatin. Benefit increases might be capped at sme percent f the CPl's grwth rate, cmpensating fr past increases in the replacement rate resulting frm a technical flaw in the indexing mechanism. Such a limit culd als be justified n the grunds that Scial Security benefits have been increasing at higher rates than average earnings, imprving the Scial Security recipients' psitin relative t wrkers, r n the basis that husing csts have verstated the increase in the cst f living as measured by the CPt Limiting the July 1982 Scial Security benefit increase t 85 percent f the increase in the CPI, fr example, wuld lwer fiscal year 1982 Scial Security utlays by abut $0.5 billin. It wuld lwer utlays in 1983 by much mre since that wuld be the first full year the ptin was in effect. Outlays wuld be $2.5 billin lwer under 9

11 First Reslutin assumptins and $2.9 billin lwer under the alternative set in Alternatively, the Cngress may chse t lk at anther index by which t adjust benefits, such as a rental-equivalent CPI r a wage index. The impacts n federal utlays f these ptins are very difficult t predict, hwever. The Huse Ways and Means Cmmittee sent t the Huse Budget Cmmittee a recnciliatin ptin that cntained anther type f indexing ptin--pstpning the annual adjustment frm July t Octber f each year, thereby putting these adjustments n a fiscal year basis. That prvisin, which ffsets recipients' lsses by giving ne-half f the expected 1982 increase in July and indexes the Octber 1982 adjustment t a 14-mnth rise in the CPl, wuld save $1.7 billin in fiscal year 1982 and a ttal f mre than twice that in the ut years. A variatin f this ptin was annunced by the Administratin in its latest Scial Security financing plan, and wuld save $3.3 billin in fiscal year Eliminating Certain Benefit Payments. Several ptins t reduce r phase ut certain specific benefits have been prpsed by past Administratins. These ptins invlve the phasing ut f students' benefits, and the eliminatin f the lump-sum death benefit and the minimum benefit. One ratinale fr these prpsals is that such benefits have recently been duplicated by ther federal prgrams mre directly targeted tward recipient grups. These ptins have been included by the Senate Finance Cmmittee in their recnciliatin instructins. Alng with prvisins t tighten eligibility fr Disability Insurance and a few ther changes, the Senate Finance Cmmittee bill wuld add ver $2.5 billin in 1982 t the trust funds, and mre than $25 billin ver the five-year perid. Alng with interfund brrwing, these ptins wuld be sufficient t ensure 10

12 benefit payments thrugh 1986, maintaining the cmbined trust fund balances at ver 12 percent f utlays in each year even under the alternative set f ecnmic assumptins. Revenue Mdificatins A number f tax changes culd raise the revenues needed by the OASI fund. Amng the pssible revenue ptins, ne wuld allw the Scial Security system t brrw frm the general fund in times f ecnmic stress. Other ptins wuld invlve further payrll tax increases r the intrductin f incme tax revenues, either directly r indirectly, t supprt the three trust funds. Payrll Tax Changes. Cngress culd fllw past practice by raising the payrll tax rate fr emplyers, emplyees, and self-emplyed persns. An increase in currently scheduled rates f between 0.5 percent t 1.0 percent wuld alne raise the revenues that the OASI fund will need by Alng with ne f the accunting ptins, such an increase wuld prvide the system with an ample trust fund reserve in the shrt run. T lessen the inflatinary and ther restrictive ecnmic effects f a payrll tax increase, such an increase culd be accmpanied by an incme tax credit r deductin. These tax credits culd be refundable and wuld be prprtinal t an individual's ttal payrll tax cntributin. General Revenue Financing. Bth the 1979 Advisry Cuncil n Scial Security and the Natinal Cmmissin n Scial Security have recmmended reallcating the HI share f the payrll tax rate amng the OASI and Dl trust funds, while als lwering the verall rate. Varius plans call fr financing either all r ne-half f HI frm an earmarked prtin f incme tax revenues. Financing HI prgram benefits in this manner has been justified n the grunds that such benefits are nt related t lifetime 11

13 payrll tax cntributins and therefre need nt be paid fr frm a separate fund financed by a payrll tax. Such a tax change wuld help reinfrce the OASI fund. General Fund Brrwing. Granting the Scial Security system the pwer t brrw frm the general fund wuld prvide the system with an added cushin against mre negative ecnmic utcmes and wuld als help avid sme ptential payrll tax increases r benefit cuts. Bth general revenue financing and general fund brrwing, hwever, have ptential shrtcmings. They culd increase pressures n the federal budget, frcing cuts in ther areas, frestalling reductins in the size f the deficit, r creating an upward pressure n incme taxes. Several Optins in Cmbinatin Taken alne, many f the ptins utlined abve ffer limited ptential t slve the OASI trust fund's financing prblem. Accunting changes alne culd entirely ease the shrt-run prblem, at a minimum, under ptimistic ecnmic assumptins, but wuld nt d s with less ptimistic nes. The OASI trust fund will certainly need additinal funds within the cming 18 mnths. Accunting changes, given n further dwnturn in the business cycle, culd allw cntinued payments 2 r 3 additinal years befre mre changes culd be needed. But if several actins were taken simultaneusly, the fund's prspects culd be markedly imprved. Cmbining anyne f the three accunting changes, fr example, with ne f the pssible mdificatins in the indexing mechanism wuld put the OASI fund in a secure psitin thrugh the end f fiscal year 1986 under current prjectins. Similarly, the adequacy f the OASI fund culd be 12

14 assured by enacting a 0.5 percent payrll tax increase abve currently scheduled rates, while at the same time reapprtining part f the DI share f payrll tax revenues t the OASI fund. A Mre Adequate Reserve Thus far, I have discussed ptins in terms f their ptential t enable the system just barely t maintain benefit payments with sme minimum level f trust fund reserves. The Cngress, hwever, may wish t cnsider building up the funds t a mre adequate level. The trust fund balances can be viewed as cntingency reserves t enable the system t absrb unexpectedly large differences between revenue and utlay flws that ccur during recessinary (and ther) perids. Studies have shwn that an adequate cntingency reserve during these perids wuld require balances f between 60 and 100 percent f utlays at the start f the year. This level f reserves, it is argued, wuld be sufficient t maintain the system thrugh a further ecnmic dwnturn slightly mre severe than that f withut having t raise taxes r lwer benefits until a recvery was under way. The system will require a much larger sum f benefit reductins r reserve increases t build up such a reserve than needed just t maintain benefit payments under the current frecast. In additin t interfund brrwing, fr example, added incme r reduced utlays wuld have t add up t $80 billin t $130 billin under the tw sets f ecnmic assumptins t maintain the system at a cmbined 50 percent f yearly utlays by Mr. Chairman, I wuld be pleased t answer any questins. 13