Congressional Budget Office
Director's Blog

Today we released a paper on updated long-term projections for Social Security. (Our last long-term projection for social security was included in the December 2007 Long-Term Budget Outlook.) As CBO has highlighted in previous reports, the number of Social Security beneficiaries will grow considerably as the baby boomers become eligible for retirement benefits. Absent legislative changes, spending for the program will therefore climb substantially and exceed the program’s revenues. CBO projects that the 75-year actuarial imbalance in the program amounts to 0.38 percent of GDP, or 1.06 percent of taxable payroll.

The projections released today differ somewhat from earlier results because of newly available programmatic and economic data, updated assumptions about future demographic and economic trends, and improvements in CBO’s models. For example, these projections assume that future immigrants will be younger and more numerous than was assumed in 2007. (This change was included in the 2008 Social Security trustees’ report; CBO adopts the trustees’ aggregate demographic assumptions.) As a result of this and other changes, CBO projects somewhat smaller future deficits than we did in our 2007 projections.

CBO’s long-term Social Security projections have always shown both a point estimate and the range within which 80 percent of the possible values are likely to fall. In this update, however, CBO has expanded its uncertainty presentation. Many figures and tables still show the 10th and 90th percentiles of various measures, but new presentations show the probabilities of specific outcomes.

Here is an example of our new presentation. A table in today’s report shows the probability that Social Security outlays will exceed revenues by a specified percentage of GDP in a selected year. For example, the likelihood that outlays will exceed revenues in 2030 is about 97 percent, CBO projects, and there is almost a 50 percent chance that the gap will be larger than 1 percentage point of GDP; the chance of its being 2 percentage points (or more) of GDP is only 6 percent.

Another new table shows the probability, for different birth cohorts, that the Social Security trust funds will be sufficient to pay specified percentages of scheduled benefits. According to CBO’s projections, the 1940s cohort, for example, is virtually certain to receive all of its scheduled first-year benefit. The 1990s cohort has only a 32 percent chance of receiving all of its scheduled first-year benefit but an 84 percent chance of receiving at least 70 percent of that benefit.

Both the analyses that show 10th and 90th percentiles and the new presentations are based on the same underlying data, but we hope that the different perspectives will help to communicate uncertainty more fully to readers.

I recently gave a talk at the Retirement Research Consortium conference on the behavioral economics lessons gleaned from retirement research and how those lessons may be applicable to other pressing policy discussions. (I blogged about it here). In that speech I argued that the full benefit age seems to have a signaling effect on social security claiming behavior. The webcast of the speech is available here. A recent blog posting argues that my discussion overlooked the role of the retirement earnings test.

It is true that if people don’t understand how the retirement earnings test (RET) works, knowing that it no longer applies starting at the full benefit age could cause some people to claim at that age. (Those who do understand the RET know that the recalculation that occurs when a beneficiary subject to the RET reaches the full benefit age compensates them for the benefits offset while they were still working–again making the benefit actuarially fair).

Whatever is or is not understood about the operations of the RET, the response to it is not large enough to drive the response that we see at the full benefit age. In a recent CBO working paper, Jae Song and Joyce Manchester found that the elimination of the RET in 2000 for people at the full benefit age through age 69 led to an increase of about 5 percentage points for men and about 2 percentage points for women in claiming at age 65 (the full benefit age) in 2000-2002. Hence the RET cannot explain the full peak of 12-14 percent moving out as the full benefit age rises.

Contractors play a substantial role in supporting the United States’ current military, reconstruction, and diplomatic operations in Iraq, accounting for a significant portion of the manpower and spending for those activities.

CBO released a study today, conducted at the request of the Senate Committee on the Budget, on the use of contractors in the Iraq theater to support U.S. activities in Iraq. The webcast of the press briefing is available here.

CBO found:

• From 2003 through 2007, and converting the funding into 2008 dollars, U.S. agencies awarded $85 billion in contracts for work to be principally performed in the Iraq theater, accounting for almost 20 percent of funding for operations in Iraq. Including funding for 2008 itself, the U.S. has likely awarded $100 billion or more for contractors in the Iraq theater.

• More than 70 percent of those obligations were for contracts performed in Iraq itself. The Department of Defense awarded contracts totaling $76 billion, and the U.S. Agency for International Development and the Department of State obligated roughly $5 billion and $4 billion, respectively, over the same period.

• Contractors provide a wide range of products and services in theater. Most contract obligations were for logistics support, construction, petroleum products, or food.

• Although personnel counts are rough approximations, CBO estimates that at least 190,000 contractor personnel, including subcontractors, work on U.S.-funded contracts in the Iraq theater. About 20 percent are U.S. citizens.

• The United States has used contractors during previous military operations, although not to the current extent. According to rough historical data, the ratio of about one contractor employee for every member of the U.S. armed forces in the Iraq theater is at least 2.5 times higher than the ratio during any other major U.S. conflict, although it is roughly comparable with the ratio during operations in the Balkans in the 1990s.

Private security contractors have been a particular focus of attention. Our analysis shows:

• Total spending by the U.S. government and other contractors for security provided by contractors in Iraq from 2003 through 2007 was between $6 billion and $10 billion.

• About 10,000 employees of private security contractors work directly for the U.S. government. Another 15,000 to 20,000 work for the Iraqi government, other contractors, and other customers, bringing the total to approximately 25,000 to 30,000 employees of private security contractors operating in Iraq.

• The costs of a private security contract are similar to those of a U.S. military unit performing similar functions. During peacetime, however, the private security contract would not have to be renewed, whereas the military unit would remain in the force structure.

Regarding the legal issues associated with contractor personnel, CBO finds that military commanders have less direct authority over the actions of contractor personnel than over their military or civilian government subordinates. In addition, the legal status of contractor personnel in Iraq is uncertain, particularly for those who are armed.

CBO’s report was prepared by Daniel Frisk and R. Derek Trunkey of our National Security Division.

Many of the most dramatic behavioral economics success stories come from work done in retirement research. Researchers have found, for example, that more workers participate in a 401(k) retirement plan if they are automatically enrolled (with the ability to opt out of the plan) than if they have to make an affirmative decision to participate. Researchers have also found that the number of investment options offered changes how participants allocate their assets, and that cues embedded in employer-based retirement plans as well as entitlement programs like Social Security and Medicare shape people’s decision about when to retire. This work has emphasized the power that defaults, framing of decisions, and perceptions of social norms have on how individuals make decisions.

I’ll be giving a speech today at the Retirement Research Consortium conference that highlights the important work done in this arena and explores how some of these behavioral economics lessons could potentially be applied to another crucial policy issue– health care costs and the large portion of those resources that do not result in improved health. The hope is that behavioral researchers will help uncover the same type of policy-relevant insights into improving people’s health — perhaps especially among those on the lowest rungs of the socioeconomic ladder — as has occurred in retirement saving.

CBO released the Monthly Budget Review today. CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.