Trustees Reports- 1995

D. PRINCIPAL ECONOMIC AND DEMOGRAPHIC ASSUMPTIONS

The future income and outgo of the OASDI program depend on many economic and demographic factors, including gross domestic product, labor force, unemployment, average earnings, productivity, inflation, fertility, mortality, net immigration, marriage, divorce, retirement patterns, and disability incidence and termination. The income will depend on how these factors affect the size and composition of the working population and the level and distribution of earnings. Similarly, the outgo will depend on how these factors affect the size and composition of the beneficiary population and the general level of benefits.

Because precise prediction of these various factors is impossible, estimates are shown in this report on the basis of three sets of assumptions, designated as intermediate (alternative II), low cost (alternative I), and high cost (alternative III). The intermediate set, alternative II, represents the Board's best estimate of the future course of the population and the economy. In terms of the net effect on the status of the OASDI program, the low cost alternative I is the more optimistic, and the high cost alternative III is the more pessimistic of the plausible economic and demographic conditions.

The values assumed after the first 5 to 25 years for both the economic and the demographic factors are intended to represent the average experience and are not intended to be exact predictions of year-by-year values. Actual future values will likely exhibit fluctuations or cyclical patterns, as in the past.

Although these sets of economic and demographic assumptions have been developed using the best available information, the resulting estimates should be interpreted with care. In particular, the resulting estimates are not intended to be exact predictions of the future status of the OASDI program, but rather, they are intended to be indicators of the trend and range of future income and outgo, under a variety of plausible economic and demographic conditions.

1. Economic Assumptions

The principal economic assumptions for the three alternatives are summarized in table II.D1.

Alternatives I, II, and III present a range of generally consistent sets of economic assumptions which have been designed to encompass most of the possibilities that might be encountered. The intermediate set of assumptions (alternative II) represents the Trustees' consensus expectation of continued moderate to relatively strong economic growth through 1996 and a return to moderate growth thereafter. The low cost assumptions (alternative I) represent a more optimistic outlook, with an indefinite continuation of the more robust economic growth experienced since the fourth quarter of 1991. The high cost assumptions (alternative III) represent a relatively pessimistic forecast in which the economy experiences generally weak economic growth and business cycles with two recessions in the short-range period. Economic cycles are not included in assumptions beyond the first 5 to 10 years of the projection period because inclusion of such cycles has little effect on the long-range estimates of financial status.

A period of sustained real economic growth began in 1982 and ended with the recession that started with the third quarter of 1990. After a total decline in real GDP of 1.6 percent through the first quarter of 1991, and a three-quarter period of slow growth following the recession, the return to steady economic growth which began in 1992 is assumed to continue for alternatives I and II, albeit at a somewhat slower pace. Real growth is assumed to be stronger for alternative I than for alternative II.

For alternative III, moderate growth and an increasing rate of price inflation are assumed through the third quarter of 1995. The first projected recession begins in the fourth quarter of 1995, lasts 3 quarters, and results in a total decline in real GDP of 1.4 percent. After 8 quarters of recovery, a second recession, with a total decline in real GDP of 3.0 percent, is assumed to begin in the third quarter of 1998, lasting 4 quarters. A two-and-one-half-year period of moderately strong economic recovery and stable rates of inflation is assumed through the year 2000. Thereafter, steady, but relatively slow, growth is assumed for alternative III. The total declines in real GDP for the two projected recessions are slightly less than those of recent recessions; however, the duration of recovery between these recessions is assumed to be much shorter than for recoveries experienced in the past 2 decades.

After the year 2004, the projected rates of growth in real GDP, for all three alternatives, are determined by the assumed rates of growth in employment, average hours worked, and labor productivity. The trend toward slower growth in real GDP after 2004 results primarily from much slower growth in the working age population, as the baby-boom generation approaches retirement and succeeding generations reflecting lower birth rates reach working age. Also contributing to the slowdown in growth in real GDP is the assumed leveling of labor force participation rates for women, which have risen substantially over the past 20 years.

Assumed values for the unemployment rates reflect the pattern of real GDP growth for each alternative. For alternatives I and II, the unemployment rate is assumed to move gradually toward ultimate average levels of 5.0 and 6.0 percent, respectively, after 1994. For alternative III, the unemployment rate is assumed to reach its ultimate average level of 7.0 percent after the recovery that is assumed to follow the second projected recession.

Unemployment rates through 2004 are in the most commonly cited form, the civilian rate, which describes the differences between aggregate civilian labor force and aggregate civilian employment. For years after 2004, however, total rates are presented. These include the military (which reduces the rate by about 0.1 percent relative to the civilian rate) and are age-sex adjusted to the 1993 labor force. Such total rates better represent the total population covered by the OASDI program and adjust for the changing age-sex distribution of the labor force, which can obscure the comparison of unemployment rates over different time periods.

Unemployment rates for the years 1994 and later are based on the new survey methodology used by the Bureau of Labor Statistics. Though unemployment rates based on this new method were initially expected to be about 0.5 percentage points higher than if based on the old method, comparisons for 1994 have shown little or no difference.

For the intermediate projection, each of the other economic parameters is selected reflecting what the Trustees believe to be the most likely future course of the economy at the time of preparation of this report, consistent with the assumed pattern of real GDP growth. The annual rate of change in the average wage in covered employment is assumed to rise, generally, from the estimated 3.5-percent increase for 1994, averaging about 4.5 percent for the period 1995 through 2004. Growth in the average wage (which is equal to price inflation plus the real-wage differential) through 2004 averages somewhat less than the ultimate assumed rate of 5.0 percent primarily because price inflation averages less than its ultimate level through this period. Between 2004 and 2015, growth in the average covered wage is slightly higher than the assumed ultimate rate of 5.0 percent, reflecting the gradual movement toward complete inclusion of Federal civilian employees. After 2015, the average covered wage growth rate remains at the ultimate assumed rate of 5.0 percent.

The annual rate of increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) declined from 4.0 percent in 1991 to 2.5 percent in 1994. Thereafter, it is assumed to increase, generally, reaching the ultimate assumed rate of 4.0 percent by the year 2002. The CPI-W (hereinafter denoted as `CPI') is used to determine automatic cost-of-living benefit increases under the OASDI program.

The real-wage differential (i.e., the difference between the annual rates of change in the average wage in covered employment and in the CPI) is estimated to be 1.0 percent in 1994. After 1994, under the intermediate alternative, the real-wage differential is projected to be between 0.7 and 1.1 percent for years 1995 through the year 2015, thereafter remaining at the ultimate assumed differential of 1.0 percent.

Under the intermediate alternative, the average annual interest rate for securities newly issued to the trust funds is assumed to increase from 7.1 percent in 1994 to 7.7 percent for 1995, and decline gradually thereafter, reaching its ultimate value of 6.3 percent by 2005. The annual rate of growth in total labor force increased from 0.7 percent in 1993 to 2.2 percent in 1994. After 1994 the labor force is projected to increase at about 1.0 percent per year, on the average, through 2002, and to increase more slowly thereafter, reflecting the projected slowing of growth in the working-age population as compared with the experience of the 1980s and early 1990s.

For alternatives I and III, respectively, values for each of the economic parameters are selected which, in general, result in a more optimistic and a more pessimistic future financial status of the program.

2. Demographic Assumptions

The principal demographic assumptions for the three alternatives are shown in table II.D2.

For the intermediate projection, the assumed ultimate total fertility rate of 1.9 children per woman is attained in 2019 after a gradual decline from the preliminary estimate for 1994 of 2.06 children per woman. The age-sex-adjusted death rate is assumed to decrease steadily during the entire projection period, with a total reduction of 35 percent from the 1994 level by 2069. Life expectancies at birth in 2070 are 77.7 years for men and 83.8 years for women, compared to 72.1 and 79.0 years, respectively, in 1994. Life expectancies at age 65 in 2070 are projected to be 18.3 years for men and 22.2 years for women, compared to 15.2 and 19.0 years, respectively, in 1994. The projected death rates reflect the effects of assumed cases of Acquired Immunodeficiency Syndrome (AIDS), using estimates prepared by the Centers for Disease Control and Prevention (CDC) as a starting point. Total net immigration is assumed to rise over the next several years reach ing an ultimate level of 900,000 persons per year by the year 2000. The ultimate assumed level of net annual immigration is the combination of 650,000 net legal immigrants per year and 250,000 net other-than-legal immigrants per year.

For alternative I, the total fertility rate is assumed to rise to an ultimate average level of 2.2 children per woman by 2019. The age-sex-adjusted death rate is assumed to decrease more slowly than for alternative II, with the total reduction from the 1994 level being 16 percent by 2069. Life expectancies at birth in 2070 are 75.1 years for men and 80.8 years for women, while at age 65 they are 16.1 and 19.7 years, respectively. Total net immigration is ultimately assumed to be 1,150,000 persons per year. The assumed level of net annual immigration is the combination of 750,000 net legal immigrants per year and 400,000 net other-than-legal immigrants per year.

For alternative III, the total fertility rate is assumed to decrease to an ultimate level of 1.6 by 2019. The age-sex-adjusted death rate is assumed to decrease more rapidly than for alternative II, with the total reduction from the 1994 level being 54 percent by 2069. Life expectancies at birth in 2070 are 81.2 years for men and 87.7 years for women, while at age 65 they are 21.4 and 25.3 years, respectively. Total net immigration is ultimately assumed to be 750,000 persons per year, the combination of 600,000 net legal immigrants per year and 150,000 net other-than-legal immigrants per year.

In addition to the assumptions discussed above, many other factors are necessary to prepare the estimates presented in this report. Section II.H includes a discussion of many of those factors.

The ultimate values presented in tables II.D1 and II.D2 reflect little change from the ultimate values used for the 1994 Annual Report. Different levels, as opposed to rates of change, in several factors reflect, primarily, different starting levels based on additional data collected since the last report. The increase in the annual net immigration is due to an increase of 50,000 in the annual net number of other-than-legal immigrants entering the Social Security area population each year. This increase is consistent with estimates based on recent data from the Immigration and Naturalization Service. The effect on the financing of the OASDI program of this and other changes is discussed in section II.F2.