The basic economic assumptions are embodied in three alternatives that are designed to provide a reasonable range of effects on Social Security’s financial status. The intermediate assumptions reflect the Trustees’ consensus expectation of moderate economic growth throughout the projection period. The low cost assumptions represent a more optimistic outlook, with relatively strong economic growth. The high cost assumptions represent a relatively pessimistic scenario, with weak economic growth and two
recessions in the short-range period.
Based on the latest data and estimates, the economy is assumed to have been above its sustainable potential level of output and employment during the latter half of 2007. Under all three sets of assumptions the economy is assumed to reach the sustainable, potential level of output by the end of the short-range period. Economic cycles are not included in the assumptions beyond the first 5 to 10 years of the projection period because they have little effect on the long-range estimates of financial status.
This report also includes a stochastic projection that provides a probability distribution of possible future outcomes that is centered around the Trustees’ intermediate assumptions. Additional economic assumptions and modeling are required for these projections. These are discussed in Appendix
E.
The following sections 1 through
4 present the principal economic assumptions for the three alternatives that are summarized in table
V.B1. The subsequent sections
5 through
7 present additional economic factors, summarized in table
V.B2, that are critical to the 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 gross domestic product (GDP) to hours worked by all workers.
1 The rate of change in total- economy productivity is a major determinant in the growth of average earnings. For the 40 years from 1966 to 2006, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.0, 1.3, 1.2, and 2.1 percent for the 10-year periods 1966-76, 1976-86, 1986-96, and 1996‑2006, respectively. However, it should be noted that this growth rate of 1.7 percent reflects a shift of employment from low (farm) to high (nonfarm) productivity sectors that is not expected to continue in the future.
Because productivity growth can vary substantially within economic cycles, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.2, and 1.6 percent over the economic cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively.
The ultimate annual increases in productivity are assumed to be 2.0, 1.7, and 1.4 percent for the low cost, intermediate, and high cost assumptions, respectively. These rates of increase are the same as those used in the 2007 report, and reflect the belief that recent strong growth in nonfarm 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 about 1.4 percent for 2007, average about 1.9 percent for 2008 and 2009, then gradually decline to the ultimate assumed level of 1.7 percent by 2014. For the low cost assumptions, the annual change in productivity averages about 2.1 percent over the 2007 to 2012 period, and reaches the ultimate assumed level of 2.0 percent by 2017. For the high cost assumptions, the annual change in productivity decreases from 1.4 percent for 2007 to 0.1 percent for 2008. Thereafter, the annual change in productivity varies with economic cycles until reaching its ultimate growth rate of 1.4 percent for 2017.
Future changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (hereafter denoted as CPI) will directly affect the OASDI program through the
automatic cost-of-living benefit increases. Future changes in the GDP chain-type price index (hereafter, the 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 4.6 percent for the 40 years from 1966 to 2006, the result of average annual increases of 5.8, 6.6, 3.6, and 2.5 percent for the 10-year periods 1966-76, 1976-86, 1986-96, and 1996-2006, respectively. The GDP deflator increased at an average annual rate of 4.1 percent from 1966 to 2006, the result of average annual increases of 5.7, 5.9, 2.8, and 2.2 percent for the same respective 10-year periods.
The ultimate annual increases in the CPI are assumed 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 2007 report, and reflect a belief that future inflationary shocks will likely be offset by succeeding periods of relatively slow inflation due to persistent international competition, and that future monetary policy will be similar to the recent past, with its strong emphasis on holding the growth rate in prices to relatively low levels.
For each alternative, the ultimate annual increase in the GDP deflator is assumed to be equal to the annual increases in the CPI minus a 0.4 percentage point price differential. This differential is based primarily on methodological differences in the construction of the two indices, and is the same as the one used in the 2007 report. Hence, for the intermediate assumptions, the ultimate annual increase in the GDP deflator is 2.4 percent, equal to the 2.8 percent assumed ultimate annual increase in the CPI less the 0.4 percentage point price differential. Similarly, the ultimate annual increases in the GDP deflator are 1.4 and 3.4 percent for the low cost and high cost assumptions, respectively.
For the intermediate assumptions, the annual change in the CPI is assumed to decrease from 2.8 percent for 2007 to 2.5 percent for 2009, then rise gradually to the assumed ultimate rate of 2.8 percent for 2010 and later. For the low cost assumptions, the annual change in the CPI is assumed to decrease from 2.8 percent for 2007, to the assumed ultimate rate of 1.8 percent by 2010. For the high cost assumptions, the annual change in the CPI mostly increases from 2.8 percent for 2007 to 5.7 percent by 2012, then decreases to its assumed ultimate rate of 3.8 percent as of 2016. The price differential, defined as the percent change in the CPI less the GDP deflator percent change, is estimated to be 0.1 percentage point for 2007. For 2008, the price differential is assumed to be 0.8 percentage point, reflecting the relative effects on the two price measures of the rise in oil prices in the second half of 2007. For all three alternatives, the price differential is projected to be approximately 0.4 percentage point for 2009 and later.
The level of average (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, increases in the level of average wages in the U.S. economy directly affect the indexation, under the automatic-adjustment provisions in the law, of the OASDI benefit formulas, the contribution and benefit base, the exempt amounts under the retirement
earnings test, the amount of earnings required for a quarter of coverage, and under certain circumstances, the 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 total civilian (household) 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. Assumed future growth rates in productivity and the GDP deflator are discussed in the previous two sections.
The average annual change in average hours worked was ‑0.3 percent over the last 40 years, and -0.9, -0.1, 0.3, and -0.3 percent for the 10-year periods 1966-76, 1976-86, 1986‑96 and 1996‑2006, respectively. The average annual change in average hours worked was -0.2 percent over the last four complete economic cycles covering the period from 1966 to 2000. The annual change in average hours worked averaged -0.7, -0.6, 0.0, and 0.1 percent over the economic cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively.
For the 2008 report, 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 2007 report.
The average annual change in the ratio of earnings to compensation was ‑0.2 percent from 1966 to 2006. For wage workers, the assumed ultimate annual rates of change in the ratio of earnings to compensation are -0.1, -0.2, and ‑0.3 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 0.809 for 2007 to 0.698 for 2082. The ratio of compensation to GDP is assumed to be stable.
Thus, the ultimate projected annual growth rate in average U.S. earnings is about 3.9 percent for the intermediate assumptions. This growth rate reflects assumed ultimate annual growth rates of about 1.7, -0.2, 0.0, and 2.4 percent for productivity, the ratio of earnings to compensation, average hours worked, and the GDP deflator, respectively. Similarly, the ultimate projected annual growth rate in average nominal U.S. earnings is 3.4 percent for the low cost assumptions and 4.4 percent for the high cost assumptions.
Over long periods of time the average annual growth rates in average U.S. earnings and average earnings in OASDI covered employment are expected to be very close to the average annual growth rates in the average wage in OASDI covered employment (henceforth the average covered wage). Thus, the assumed ultimate annual growth rates in the average covered wage are 3.4, 3.9, and 4.4 percent for the low cost, intermediate, and high cost assumptions, respectively. For the intermediate assumptions, the annual rate of change in the average covered wage is estimated to be 4.4 percent for 2007, then generally declining until reaching its assumed ultimate annual growth rate of 3.9 percent after 2017.
For simplicity, 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. Over the 40-year period, 1967-2006, the real-wage differential averaged 0.9 percentage point, the result of averages of 0.7, 0.7, 0.5, and 1.6 percentage points for the 10-year periods 1967-76, 1977-86, 1987-96, and 1997‑2006, respectively. The assumed ultimate annual average covered real-wage differentials are 1.6, 1.1, and 0.6 percentage point(s) for the low cost, intermediate, and high cost assumptions, respectively.
Based on preliminary data, the real-wage differential is estimated to be 1.6 percentage points for 2007. For the intermediate assumptions, the real-wage differential is projected to fall to 1.3 percentage points in 2008, then rise to 1.7 percentage points in 2009, reflecting an assumed economic slowdown and recovery over the period. The real-wage differential is projected to average about 1.2 percentage points for the 2010 to 2013 period, then average the ultimate assumed differential of 1.1 percentage points (3.9 percent nominal wage growth less 2.8 percent CPI inflation) thereafter.
For the low cost assumptions, the real-wage differential is assumed to rise to 2.1 percentage points by 2009, then generally decline to an average of about 1.5 percentage points over the 2012 to 2017 period, then averaging the ultimate assumed real-wage differential of 1.6 percentage points for 2018 and later. For the high cost assumptions, the real-wage differential for the short-range period is projected to fluctuate between -1.3 and 2.0 percentage points, eventually stabilizing at about 0.6 percentage point for 2018 and later.
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Averageannual wage in covered employment
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