All three sets of basic economic assumptions project a continuation of the gradual recovery from the recent recession that started in December 2007. The intermediate assumptions reflect the Trustees’ consensus expectation of sustained moderate economic growth after the recovery and their best estimate for various other economic parameters. The low-cost assumptions represent a more optimistic outlook and assume relatively strong economic growth and optimistic levels for other parameters. The high-cost assumptions represent a more pessimistic scenario, with relatively weak economic growth and pessimistic levels for other parameters.
Actual economic data were available through the third quarter of 2010 at the time the assumptions for this report were set. The data indicated that economic activity peaked in December 2007
1 with the level of gross domestic product (GDP) about 1 percent above the estimated long-term sustainable trend level. A severe recession followed, with a low point in the economic cycle reached in the second quarter of 2009
2 that was about 7 percent below the estimated sustainable trend level. The actual growth rate in real GDP has been positive in all quarters since then, but not as strong as in typical recoveries. The economy is projected to return to its sustainable trend level of output in each alternative within the first 10 years of the projection period and to remain on that trend thereafter. However, the speed of the return varies by alternative. The economy is projected to return to its sustainable trend level of output in 2018 for the intermediate assumptions, 2016 for the low-cost assumptions, and 2020 for the high-cost assumptions. Economic cycles are not included in the assumptions beyond the first 10 years of the projection period because complete cycles have little effect on the long-range estimates of financial status.
The remainder of this section discusses the key economic assumptions underlying the three sets of projections of the future financial status of the combined OASI and DI Trust Funds.
“Total U.S. economy productivity” is defined as the ratio of real GDP to hours worked by all workers.
3 The rate of change in total-economy productivity is a major determinant in the growth of average earnings. For the 40 years from 1969 to 2009, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 1.7, 1.3, 1.7, and 2.1 percent for the 10-year periods 1969-79, 1979-89, 1989-99, and 1999‑2009, respectively. For 2010, the estimated annual change in productivity is 2.7 percent.
It is more useful to consider historical average growth rates for complete economic cycles, because productivity growth can vary substantially within economic cycles. The annual increase in total productivity, covering the 41‑year period from 1966 to 2007, also averaged 1.7 percent over the last five complete economic cycles (measured from peak to peak). The annual increase in total productivity averaged 2.3, 1.2, 1.2, 1.8, and 2.1 percent over the economic cycles 1966-73, 1973-78, 1978-89, 1989-2000, and 2000-07, respectively.
The ultimate annual increases in total economy productivity are assumed to be 2.0, 1.7, and 1.4 percent for the low-cost, intermediate, and high-cost assumptions, respectively, and are consistent with ultimate annual increases in private non-farm business productivity of 2.4, 2.0, and 1.7 percent. The private non-farm business sector excludes the farm, government, non-profit institution, and private household sectors. These rates of increase are the same as those used in the 2010 report, and reflect the belief that recent strong growth in private non‑farm business productivity, after the relatively poor performance from 1973 to 1995, is consistent with future long-term growth that mirrors the long-term trends of the past.
For the intermediate assumptions, the annual change in productivity is assumed to be 1.7 percent for 2011, then average 2.0 percent for 2012 through 2014, 1.6 percent for 2015 through 2020, and reach its ultimate value of 1.7 percent thereafter. For the low-cost assumptions, the annual change in productivity is assumed to be 1.8 percent for 2011, then average 2.1 percent for 2012 through 2014, 1.8 percent for 2015 through 2020, and reach its ultimate value of 2.0 percent thereafter. For the high-cost assumptions, the annual change in productivity is assumed to be 1.3 percent for 2011, then average 1.9 percent for 2012 through 2014, and average the assumed ultimate value of 1.4 percent thereafter.
Future changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI) will directly affect the OASDI program through the
automatic cost-of-living benefit increases. Future changes in the GDP price index (GDP deflator) affect the nominal levels of GDP, wages, self-employment income, average earnings, and
taxable payroll.
Historically, the CPI increased at an average annual rate of 4.4 percent for the 40 years from 1969 to 2009, the result of average annual increases of 7.1, 5.3, 2.9, and 2.5 percent for the 10-year periods 1969-79, 1979-89, 1989-99, and 1999-2009, respectively. The GDP deflator increased at an average annual rate of 4.0 percent from 1969 to 2009, the result of average annual increases of 6.6, 4.7, 2.2, and 2.4 percent for the same respective 10-year periods. For 2010, the annual change is estimated to be 2.1 percent for the CPI and 1.0 percent for the GDP deflator.
The ultimate annual increases in the CPI are estimated to be 1.8, 2.8, and 3.8 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These rates of increase are the same as those used in the 2010 report, and reflect a belief that future inflationary shocks will likely be offset by succeeding periods of relatively slow inflation due to future monetary policy that is similar to that of the last 20 years, with a continuing emphasis on holding the growth rate in prices to relatively low levels.
For the intermediate assumptions, as the economy moves on a path toward full employment, the annual change in the CPI is assumed to increase gradually from 1.2 percent in 2011 until it reaches the ultimate growth rate of 2.8 percent for 2019 and later. The actual levels of the CPI in the third quarters of 2009 and 2010 were below the level of the CPI in the third quarter of 2008; therefore, there were no automatic cost-of-living benefit increases for December 2009 and December 2010. Automatic cost-of-living benefit increases are projected to resume in December 2011 and occur in each subsequent year.
For the low-cost assumptions, the annual change in the CPI is assumed to increase from 1.1 percent for 2011 until it reaches its ultimate assumed annual change of 1.8 percent for 2018 and later. For the high-cost assumptions, the annual change in the CPI is assumed to increase from 1.6 percent for 2011 until it reaches its ultimate assumed annual change of 3.8 percent for 2019 and later.
The ultimate annual increase in the GDP deflator is assumed to be equal to the annual increase in the CPI minus a price differential. The price differential is based primarily on methodological differences in the construction of the two indices. The price differential is assumed to equal 0.3, 0.4, and 0.5 percentage point for the low-cost, intermediate, and high-cost alternatives, respectively. Varying the ultimate projected price differential across alternatives recognizes the historical variation in this concept. Accordingly, the ultimate annual increase in the GDP deflator is assumed to be 1.5 (1.8 less 0.3), 2.4 (2.8 less 0.4), and 3.3 (3.8 less 0.5) percent for the low-cost, intermediate, and high-cost alternatives, respectively. These assumptions reflect the same ultimate price differentials and GDP deflator growth rates assumed for the 2010 report.
The price differential is estimated to be 1.1 percentage points for 2010. Under the intermediate assumptions, the price differential is projected to be 0.0 percentage point for 2011. This large change in the price differential is mostly due to the fluctuations in oil prices in recent years. Changes in oil prices affect the CPI much more than the GDP deflator because oil represents a much larger share of U.S. consumption than of U.S. production. Oil prices are assumed to behave less cyclically in the future. The price differential is assumed to be 0.4 percentage point in 2012 and later.
The average level of nominal earnings in OASDI covered employment for each year has a direct effect on the size of the taxable payroll and on the future level of average benefits. In addition, under the automatic-adjustment provisions in the law, growth in the average wage in the U.S. economy directly affects certain parameters used in the OASDI benefit formulas as well as additional parameters used for the computation of the contribution and benefit base, the exempt amounts under the retirement
earnings test, the amount of earnings required for a quarter of coverage, and certain automatic cost-of-living benefit increases.
“Average U.S. earnings” is defined as the ratio of the sum of total U.S. wage and salary disbursements and proprietor income to the sum of total U.S. military and civilian employment. The growth rate in average U.S. earnings for any period is equal to the combined growth rates for total U.S. economy productivity, average hours worked, the ratio of earnings to compensation (which includes fringe benefits), the ratio of compensation to GDP, and the GDP deflator.
The average annual change in average hours worked was ‑0.3 percent over the last 40 years, and -0.7, -0.0, 0.3, and -0.8 percent for the 10-year periods 1969-79, 1979-89, 1989‑99, and 1999‑2009, respectively. The average annual change in average hours worked was -0.3 percent over the last five complete economic cycles covering the period from 1966 to 2007. The annual change in average hours worked averaged -0.7, -0.7, 0.0, 0.1, and ‑0.6 percent over the economic cycles 1966-73, 1973-78, 1978-89, 1989‑2000, and 2000‑07, respectively.
The ultimate annual rates of change for average hours worked are assumed to be 0.1, 0.0, and -0.1 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These ultimate annual rates of change for average hours worked are the same as those assumed for the 2010 report.
The average annual change in the ratio of earnings to compensation was ‑0.2 percent from 1969 to 2009. Most of this decrease has been due to the relative increase in employer-sponsored group health insurance for wage workers. Assuming that the level of total employee compensation is not affected by the amount of employer-sponsored group health insurance, any increase or decrease in employer-sponsored group health insurance leads to a commensurate decrease or increase in other components of compensation, including wages. Projections of future ratios of earnings to compensation follow this principle and are consistent with the year-by-year projections of the cost of employer-sponsored group health insurance from the Office of the Actuary at the Centers for Medicare and Medicaid Services. The total amount of future employer-sponsored group health insurance is projected to increase more slowly due to provisions of the Affordable Care Act of 2010, as described in the 2010 Report. Data from the Bureau of Economic Analysis indicate that the other significant component of non-wage employee compensation is employer contributions to retirement plans, which are assumed to grow faster than employee compensation in the future as life expectancy and potential time in retirement increase.
The assumed annual rates of change in the ratio of wages to employee compensation average 0.0, ‑0.1, and ‑0.2 percent for the low-cost, intermediate, and high-cost assumptions, respectively. Under the intermediate assumptions, the ratio of wages to employee compensation is projected to decline from 0.802 for 2010 to 0.733 for 2085. The rate of this decline is about half the rate assumed prior to enactment of the Affordable Care Act of 2010, as described in the 2010 report. The ratio of compensation to GDP is assumed to be stable at 0.649 after 2019.
The projected average annual growth rate in average U.S. earnings from 2020 to 2085 is about 4.0 percent for the intermediate assumptions. This growth rate reflects the average annual growth rate of approximately ‑0.1 percent for the ratio of earnings to compensation, and the assumed ultimate annual growth rates of 1.7, 0.0, and 2.4 percent for productivity, average hours worked, and the GDP deflator, respectively. Similarly, the projected average annual growth rate in average nominal U.S. earnings is 3.6 percent for the low-cost assumptions and 4.4 percent for the high-cost assumptions.
Over long periods, the average annual growth rate in the average wage in OASDI covered employment (henceforth the “average covered wage”) is expected to be very close to the average annual growth rate in average U.S. earnings. Specifically, the assumed average annual growth rates in the average covered wage from 2020 to 2085 are 3.6, 4.0, and 4.4 percent for the low-cost, intermediate, and high-cost assumptions, respectively. The annual rate of change in the average covered wage is estimated to be ‑1.8 percent for 2009, which reflects the recession low point, and is estimated to be 2.9 percent for 2010. For the intermediate assumptions, as the economy recovers, the annual rate of change in the average covered wage is assumed to average 4.2 percent from 2011 to 2019, and 3.9 percent from 2020 to 2025. Thereafter, the assumed average annual rate of change in the average covered wage is 4.0 percent.
Real increases in the average OASDI covered wage have traditionally been expressed in the form of real-wage differentials — i.e., the percentage change in the average covered wage minus the percentage change in the CPI. This differential is closely related to assumed growth rates in average earnings and productivity, which are discussed in the previous sections. For the 40-year period including 1970 through 2009, the real-wage differential averaged 0.7 percentage point, the result of averages of 0.5, 0.4, 1.5, and 0.4 percentage points for the 10-year periods 1970-79, 1980-89, 1990-99, and 2000‑2009, respectively.
For the years 2020‑85, the annual real-wage differentials for OASDI covered employment average 1.8, 1.2, and 0.6 percentage points for the low-cost, intermediate, and high-cost assumptions, respectively.
Based on preliminary data, the real-wage differential is estimated to be 0.8 percentage point for 2010. For the intermediate assumptions, the real-wage differential is projected to average 2.8 percentage points for 2011 through 2013, an improvement that reflects the economic recovery. Thereafter, the real-wage differential is assumed to gradually decline to 1.1 percentage points for 2020 and to average 1.2 percentage points for 2021 through 2085. For the low-cost assumptions, the real-wage differential is projected to average 3.3 percentage points for 2011 through 2013, 2.2 percentage points for 2014 through 2020, and 1.8 percentage points for 2021 through 2085. For the high-cost assumptions, the real-wage differential is projected to average 2.3 percentage points for 2011 through 2013, and then mostly decline to 0.6 percentage point by 2020, and to average 0.6 percentage point for 2021 through 2085.
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The civilian labor force is projected by age, sex, marital status, and presence of children. Projections of the labor force participation rates for each group take into account disability prevalence, educational attainment, the average level of Social Security retirement benefits, the state of the economy, and the change in life expectancy. The projections also include a “cohort effect” that applies differences in participation rates for a cohort at a specific age, relative to earlier cohorts at the same age, to participation rates for that cohort at older ages.
The annual rate of growth in the labor force decreased from an average of about 2.1 percent during the 1970s and 1980s to about 1.1 percent from 1990 to 2009. Further slowing of labor force growth is projected due to a substantial slowing of growth in the working age population in the future — a natural consequence of the
baby-boom generation approaching retirement and succeeding lower-birth-rate cohorts reaching working age. Under the intermediate assumptions, the labor force is projected to increase by about 0.7 percent per year, on average, through 2020. Thereafter, the labor force is projected to increase by an average of 0.5 percent per year over the remainder of the 75‑year projection period.
The projected labor force participation rates are not basic assumptions. They are derived from a historically based structural relationship that uses demographic and economic assumptions specific to each alternative. More optimistic economic assumptions in the low-cost alternative are generally associated with higher labor force participation rates, but demographic assumptions in the low-cost alternative (such as slower improvement in longevity) are consistent with lower labor force participation rates. The relations with various basic assumptions move the labor force participation rates in opposite directions; therefore, the net effect is small, and projected labor force participation rates do not vary substantially across alternatives.
Historically, labor force participation rates reflect trends in demographics and pensions. Between the mid‑1960s and the mid‑1980s, labor force participation rates at ages 50 and over declined for males and were fairly stable for females. During this period, the baby boom generation reached working age and more women entered the labor force. This increasing supply of labor allowed employers to offer early-retirement options that were attractive. Between the mid‑1980s and the mid‑1990s, participation rates roughly stabilized for males and increased for females. Since the mid‑1990s, however, participation rates for both sexes at ages 50 and over have generally risen significantly.
Many economic and demographic factors, including longevity, health, disability prevalence, the business cycle, incentives for retirement in Social Security and private pensions, education, and marriage patterns, will influence future labor force participation rates. Some of these factors are modeled directly. To model the effects of other factors related to increases in life expectancy, projected participation rates are adjusted upward for mid-career and older ages to reflect assumed increases in life expectancy. For the intermediate projections, this adjustment adds about 3.0 percent to the total labor force in 2085.
For men age 16 and over, the projected age-adjusted labor force participation rates for 2085 are 72.1, 72.7, and 72.5 percent for the low-cost, intermediate, and high-cost assumptions, respectively, compared to the 2009 level of 72.0 percent. (Age-adjusted labor force participation rates are adjusted to the 2009 age distribution of the civilian noninstitutional U.S. population.) These rates reflect the net effect of: (1) increases due to assumed improvements in life expectancy; (2) decreases due to higher assumed disability prevalence rates; and (3) decreases due to an increasing proportion of males who never marry. For women age 16 and over, the projected age-adjusted labor force participation rates for 2085 are 60.9, 60.7, and 60.5 percent, for the low-cost, intermediate, and high-cost assumptions, respectively, compared to the 2009 level of 59.2 percent. These projections reflect the combination of decreases due to higher assumed disability prevalence rates, increases due to assumed improvements in life expectancy, and increases due to assumed changes in the proportion of females who are separated, widowed, divorced, or never married.
The unemployment rates presented in table V.B2 are in the most commonly cited form, the civilian rate. For years through 2020, total civilian rates are presented without adjustment for the changing age-sex distribution of the population. For years after 2020, unemployment rates are presented as age-sex-adjusted rates (using the age-sex distribution of the 2009 civilian labor force). Age-sex-adjusted rates allow for more meaningful comparisons across longer time periods. The effect of this adjustment through 2020 is small.
The total civilian unemployment rate reflects the projected levels of unemployment for various age-sex groups of the population. The unemployment rate for each group is projected by relating changes in the unemployment rate to the changes in the economic cycle, as measured by the ratio of actual to potential GDP. For each alternative, the total civilian unemployment rate is projected to move toward the ultimate assumed rate as the economy moves toward the long-range sustainable growth path.
The ultimate age-sex-adjusted unemployment rate for each alternative is assumed to be reached by 2020. The ultimate assumed unemployment rates are 4.5, 5.5, and 6.5 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These values are the same as those assumed for the 2010 report.
Real GDP can be expressed as the product of three components: (1) total employment;
4 (2) productivity; and (3) average hours worked. Given this, the growth rate in real GDP is approximately equal to the sum of the growth rates for total employment, productivity, and average hours worked. For the 40-year period from 1969 to 2009, the average growth rate in real GDP was 2.8 percent, which approximately equals the sum of the average growth rates of 1.4, 1.7, and ‑0.3 percent for total employment, productivity, and average hours worked, respectively.
For the intermediate assumptions, the average annual growth in real GDP is projected to be 3.0 percent from 2010 to 2020, the approximate sum of component growth rates of 1.2 percent for total employment, 1.7 percent for productivity, and 0.0 percent for average hours worked. This projected average annual growth in real GDP of 3.0 percent can also be approximately separated into an underlying sustainable trend rate of change of 2.2 percent for this period, plus an above-trend growth rate of 0.7 percent that is mostly associated with a relatively rapid increase in employment as the economy recovers and the unemployment rate falls from near 10 percent in 2010 to its assumed ultimate level of 5.5 percent in 2018. After 2020, no economic cycles are projected. Accordingly, the projected annual growth rate in real GDP is determined by combining the projected growth rates for total employment, total U.S. economy productivity, and average hours worked. After 2050, the annual growth in real GDP is 2.1 percent due to the assumed ultimate growth rates of 0.4 percent for total employment, 1.7 percent for productivity, and 0.0 percent for average hours worked.
For the low-cost assumptions, the annual growth in real GDP is projected to average 3.5 percent over the decade ending in 2020. The relatively faster growth is due mostly to higher assumed rates of growth for employment and worker productivity. For the high-cost assumptions, the annual growth in real GDP is projected to average 2.4 percent for the decade ending in 2020.
Average annual nominal and real interest rates for new trust fund assets are presented in table
V.B2. The nominal rate is the average of the nominal interest rates for special U.S. Government obligations issuable to the trust funds in each of the 12 months of the year. Interest for these securities is generally compounded semiannually. The “real interest rate” (ex post) is defined to be the annual compound yield rate for investments in these securities divided by the annual rate of growth in the CPI for the first year after issuance. The real rate shown for each year reflects the actual realized (historical) or expected (future) annual real yield on securities issuable in the prior year.
In developing a reasonable range of assumed ultimate future real interest rates for the three alternatives, historical experience was examined for the 40 years, 1970-2009, and for each of the 10-year subperiods, 1970-79, 1980-89, 1990-99, and 2000-2009. For the 40-year period, the real interest rate averaged 2.9 percent per year. For the four 10-year subperiods, the real interest rates averaged 0.0, 5.2, 4.2, and 2.3 percent, respectively. The assumed ultimate real interest rates are 3.6 percent, 2.9 percent, and 2.1 percent for the low-cost, intermediate, and high-cost assumptions, respectively, and are unchanged from the 2010 report. These ultimate real interest rates, when combined with the ultimate CPI assumptions of 1.8, 2.8, and 3.8 percent, yield ultimate nominal interest rates of about 5.4 percent for the low-cost assumptions, about 5.7 percent for the intermediate assumptions, and about 5.9 percent for the high-cost assumptions. These ultimate nominal rates are assumed to be reached by the end of the short-range period.
The actual average annual nominal interest rate was 2.9 percent for 2009, which means that assets newly invested in 2009 would increase by 2.9 percent a year later. Average prices are estimated to rise from 2009 to 2010 by 2.1 percent; therefore, the annual real interest rate for 2010 is 0.9 percent. For the next 10-year short-range projection period, nominal interest rates are projected based on changes in the business cycle and in the CPI. Under the intermediate assumptions, the nominal interest rate is projected to rise to the ultimate assumed level of 5.7 percent by 2020. For the low-cost assumptions, the average annual nominal interest rate is assumed to reach an ultimate level of about 5.4 percent by 2019. For the high-cost assumptions, it is assumed to reach the ultimate level of about 5.9 percent by 2020.
