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APPENDIX
ADemographic and Economic Assumptions Used in CBO’s Analysis
A set of demographic and economic assumptions underlies the projections that make up the Congressional Budget Office’s (CBO’s) long-term budget outlook for the years 2009 to 2083. To project overall trends in demographics and disability, CBO adopted the assumptions of the Social Security trustees—specifically, for this analysis, the intermediate assumptions in the 2009 trustees’ report on the aggregate fertility rate in the United States, the rate of decline in mortality, levels of immigration and emigration, and the incidence and termination rates in the Social Security Disability Insurance program.1 CBO’s long-term economic assumptions are based on the assumptions used in developing its baseline budget projections and on historical economic trends.
For estimates covering fiscal years 2009 through 2019, CBO used economic assumptions consistent with those in its March 2009 economic forecast, which underlies its current baseline budget projections for the same period.2 The assumptions for 2019 in turn provided the jump-off point in developing assumed values for the relevant economic variables for the projection period’s later years (2020 to 2083).
CBO chose assumptions about rates of interest, inflation, and unemployment directly. In contrast, CBO did not make specific assumptions about the growth of GDP or the rate of growth of earnings but instead derived those variables by using other economic and demographic assumptions. (Annual values for selected economic assumptions can be found in the supplementary data for this report on CBO’s Web site.) The assumptions underlying projections of the growth of health care costs are discussed in Chapter 2.
Assumptions About Interest, Inflation, and Unemployment for 2020 and Later
For its projections after the 10-year baseline period, CBO assumed that the real (inflation-adjusted) rate of interest on federal debt held by the public would, after a transition period, be 3.0 percent a year, about equal to the average rate observed over the past 50 years. CBO used the same value for the discount rate in its present-value calculations. CBO also assumed that annual inflation—as measured by growth in the consumer price index for urban wage earners and clerical workers (CPI-W)—would be 2.0 percent and that over the long run the unemployment rate would be 4.8 percent.
Assumptions Underlying Projections of Gross Domestic Product and Earnings
CBO projected that from 2020 through the end of the projection period, real GDP would grow at an average annual rate of 2.2 percent and real earnings would grow at an average annual rate of 1.4 percent. Those estimates were based on CBO’s demographic assumptions, as noted above, and on four underlying economic assumptions:
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Growth of Productivity. CBO assumed that over the long term, total factor productivity (average real output per unit of combined labor and capital services) would grow at an average annual rate of 1.3 percent. CBO used that assumption in an economic model that includes projections of growth in the supply of labor and capital to compute the resulting growth in labor productivity (measured as growth in output per hour worked). Projected labor productivity growth averages 1.9 percent annually. Labor productivity does not translate directly into earnings growth.
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Changes in the Ratio of Taxable Earnings to Total Compensation. CBO assumed that over the projection period, the share of compensation that workers received as nontaxable health benefits would grow at the same rate as other (non-Medicare, non-Medicaid) health care spending, which would reduce the average rate of growth of taxable earnings.3 Specifically, as a result of the projected slowdown in cost growth for health care spending, the projected annual change in earnings as a share of compensation would slow from about -0.25 percent in 2020 to about -0.05 percent in 2083, or an average of -0.13 percent over that period. A decline occurring at such a pace would increase the projected annual growth of real wages by the same amount, relative to earnings that remained a constant share of compensation.
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Growth in Average Hours Worked. CBO assumed that, in general, the number of hours worked by people in the labor force would remain constant. However, different segments of the population work, on average, different numbers of hours. (For example, men tend to work more hours than women, and people in their 30s tend to work more hours than people in their 50s.) As a result, CBO’s projections of total average hours worked vary slightly because of projected changes in the composition of the labor force.
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Difference Between Growth Measured by the GDP Deflator and by the CPI-W. The GDP deflator and the CPI-W are two different measures of inflation. The GDP deflator is a measure of the level of prices of all final goods and services produced; it is one of the determinants of labor productivity. CBO uses the CPI-W to translate nominal earnings growth into real earnings growth. When the GDP deflator grows more slowly than the CPI-W, the projected growth of real earnings is reduced. CBO assumed that the gap, and thus the reduction in real earnings growth, would average 0.3 percentage points.
See Social Security Administration, The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (May 12, 2009).
See Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook (March 2009).
The share of other nontaxable benefits was assumed to remain constant.
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