shadows of elderly couple walking In order for Social Security to pay out scheduledbenefits, and remain solvent in the long run, payroll taxes wouldhave to be raised “immediately and permanently” by 4.6 percent.(Photo: Shutterstock)

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Massive budget deficits over the next 30 years are expected tonearly double the country's total debt, from 78 percent of grossdomestic product, where it is today, to 144 percent of GDP by 2040,according to the Congressional Budget Office's annual Long-TermBudget Outlook report.

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The CBO's extended baseline projections are based off the sameassumptions the agency uses to forecast its 10-year projections.Both forecasts presume current law remains the same, mandatoryprograms are extended, and Social Security and Medicare spending continueas scheduled even after their respective trust funds run dry.

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CBO projects Social Security's two trust funds will be depleted in 2032, before the Social SecurityAdministration's 2035 projection.

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Under current law, that would mean Social Security checks would be reduced by 24percent in 2033, and 29 percent by 2049, according to CBO.

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In order for Social Security to pay out scheduled benefits, andremain solvent in the long run, payroll taxes would have to beraised “immediately and permanently” by 4.6 percent, scheduledbenefits would have to be reduced by the same amount, or somecombination of the two measures would have to be adopted.

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Social Security is the largest single component of today'sfederal budget. Its 64 million beneficiaries in 2019 are projectedto rise to 97 million in 2049.

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But the revenue from payroll taxes and taxes on benefits thatfund the Old-Age and Survivors Insurance Trust Fund and theDisability Insurance Trust Fund will remain flat over the next 30years, at about 4.4 percent of GDP.

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An aging population will drive Social Security and Medicarespending as a percentage of GDP. Today, Social Security spendingaccounts for 4.9 percent of GDP. By 2029, it will be 5.5 percent,and 6.2 percent by 2049.

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Medicare and all other health care programs now account for 5.2percent of GDP. That rises to 6 percent by 2029, and 8.8 percent by2049.

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In 30 years, mandatory spending on scheduled benefits for thepopulation age 65 and older will account for half of allnon-interest spending in the budget. Today the share is abouttwo-fifths, according to CBO.

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The inherent uncertainty of extended forecasting is acknowledgedin CBO's report. Even under the most optimistic scenarios, debtwill rise well over today's levels. For instance, if interest ratesrise 1 percentage point higher annually than the CBO forecasts,debt would be 199 percent of GDP by 2049. If rates fall 1percentage point lower than projected, debt would be 107 percent ofGDP.

What if Social Security benefits were cut?

CBO also provides analysis on the Social Security's long-termbudget implications if benefits were limited to revenues in theprogram after the trust funds are depleted.

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The 30-year debt-to-GDP ratio projection would drop to 106percent, 38 percentage points lower than the debt level in thebaseline projection which assumes no benefit cuts.

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Lower benefits would increase the labor supply, as fewer peopleage 65 and older could retire. Private savings would increase outof necessity.

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Benefit cuts would reduce private spending by retirees, leadingto lower short-term GDP. But over the long term, GDP would behigher, as Social Security's lower impact on annual deficits wouldallow more government money to be spent in other areas. The risk ofa fiscal crisis would be lower.

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Overall, a cut in benefits would transfer wealth from oldergenerations to younger generations, resulting directly from thebenefits cuts, but also macroeconomic effects that would increasewages for workers in the long term.

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READ MORE:

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Social Security's about to pay out morethan it takes in

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Alicia Munnell: The Social Security fix nobodywants

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Ward off clients' retirement crisis with SocialSecurity talk

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.