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Congressional Budget Office
Comparing CBO’s Long-Term Projections
With Those of the Social Security Trustees
Presentation to the Social Security Advisory Board
November 18, 2016
Julie Topoleski
Health, Retirement, and Long-Term Analysis Division
This presentation draws on the testimony of Keith Hall, Director, Congressional Budget Office, before the Subcommittee on
Social Security, House Committee on Ways and Means, on September 21, 2016, www.cbo.gov/publication/51988, and
Congressional Budget Office, The Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580.
1CONGRESSIONAL BUDGET OFFICE
CBO’s long-term Social Security projections
are based on a detailed microsimulation
model that starts with data about
individuals from a representative sample
of the population and projects economic
and demographic outcomes for that
sample over time.
Projections of economic and demographic
variables are key inputs into that model.
2CONGRESSIONAL BUDGET OFFICE
Economic projections are extensions of
CBO’s 10-year economic forecast, which
underlies the agency’s budget projections.
Those economic projections reflect not just
historical averages but also trends that
many forecasters expect to continue.
3CONGRESSIONAL BUDGET OFFICE
CBO consults a variety of sources—
including our own analysis of historical
data, forecasts made by other government
agencies, panels of advisors, and academic
literature—when creating our projections.
We regularly review our projections,
sometimes in light of revised and recent
data and sometimes in light of recent
analyses.
4CONGRESSIONAL BUDGET OFFICE
CBO’s Projection of the 75-Year Actuarial Balance Is
Larger Than the Trustees’ Projection
5CONGRESSIONAL BUDGET OFFICE
Two-Thirds of the Difference Is Explained by Different
Projections of Four Major Inputs
6CONGRESSIONAL BUDGET OFFICE
The Effect on the 75-Year Actuarial Balance of Adopting
Each of the Trustees’ Major Inputs
a. The key components of nominal GDP growth are the labor force participation rate, the
unemployment rate, the rate of productivity growth, and the inflation rate.
b. Other changes include the differences in estimated income taxes paid on Social Security benefits
and the interactions among the four major inputs.
7CONGRESSIONAL BUDGET OFFICE
Like the actuarial balance, outlays and
revenues as a percentage of GDP are
useful measures of the system’s finances.
Over the next 75 years, CBO projects,
Social Security’s outlays as a percentage of
GDP will be higher, and revenues will be
lower, than the Trustees project.
8CONGRESSIONAL BUDGET OFFICE
Social Security Tax Revenues and Outlays
9CONGRESSIONAL BUDGET OFFICE
Differences Between CBO’s and the Social Security
Trustees’ Projections of Tax Revenues and Outlays in 2090
10CONGRESSIONAL BUDGET OFFICE
Four Major Inputs That Affect Social Security Projections
■ Earnings subject to Social Security payroll taxes
■ Key components of nominal GDP growth
■ Demographics—fertility, mortality, and immigration
■ Real interest rates
11CONGRESSIONAL BUDGET OFFICE
Differences Attributable to
Earnings Subject to
Social Security Payroll Taxes
12CONGRESSIONAL BUDGET OFFICE
The amount of earnings subject to Social Security
payroll taxes, as a percentage of GDP, depends
largely on the share of total earnings that is at or
below the taxable maximum, the share of total
compensation that is paid as earnings, and total
compensation as a share of GDP.
Differences in the projection of the amount of
earnings subject to the payroll tax account for 23
percent of the difference between CBO’s and the
Trustees’ projections of the 75-year actuarial
balance.
13CONGRESSIONAL BUDGET OFFICE
Share of Covered Earnings Below Social Security’s Taxable
Maximum
14CONGRESSIONAL BUDGET OFFICE
CBO’s projections of the share of earnings below
the maximum taxable amount ($118,500 in 2016)
are made on the basis of its projections of the
entire distribution of compensation.
Those projections reflect an expectation that
earnings will grow faster for higher-income people
than for others during the next decade—as they
have over the past several decades—and at similar
rates thereafter.
(The projections underlie the agency’s revenue
projections.)
15CONGRESSIONAL BUDGET OFFICE
Share of Wage and Salary Income Earned by the Top
1 Percent of Earners
16CONGRESSIONAL BUDGET OFFICE
Projections of earnings as a share of compensation
reflect trends in the cost of health insurance and
incorporate expected responses to future taxes on
health insurance.
Projections of compensation as a share of GDP
reflect the distribution of income among various
categories, such as labor income and domestic
economic profits.
(CBO revisits its projections as part of the
development of each baseline forecast; the next
revision will occur in January 2017.)
17CONGRESSIONAL BUDGET OFFICE
Differences Attributable to
Key Components of Nominal GDP Growth
18CONGRESSIONAL BUDGET OFFICE
The size of the economy affects Social Security
revenues and spending. When nominal GDP is
larger, Social Security receives more revenues
initially, and then later—when beneficiaries
retire—it pays higher benefits.
Larger nominal GDP improves the actuarial balance
because earlier years receive greater weight in the
calculation of that balance.
Differences in the projection of factors affecting
nominal GDP account for 22 percent of the
difference between CBO’s and the Trustees’
projections of the actuarial balance.
19CONGRESSIONAL BUDGET OFFICE
Growth of Nominal GDP
20CONGRESSIONAL BUDGET OFFICE
Four key components affect nominal GDP
growth:
• Labor force participation rates
• Unemployment
• Productivity growth
• Inflation
The most important is labor force
participation.
21CONGRESSIONAL BUDGET OFFICE
Labor Force Participation Rate
22CONGRESSIONAL BUDGET OFFICE
The Trustees’ projection of GDP growth:
• Suggests stronger productivity growth
than CBO’s does through the mid-2040s.
• Shows faster growth in prices than
CBO’s does.
23CONGRESSIONAL BUDGET OFFICE
The Trustees also project that the
unemployment rate will stabilize at a rate
significantly above the current rate.
In contrast, CBO projects that it will stay
roughly unchanged.
(This slightly offsets other factors that
make the Trustees’ projection of nominal
GDP higher than CBO’s.)
24CONGRESSIONAL BUDGET OFFICE
Differences Attributable to
Demographics
25CONGRESSIONAL BUDGET OFFICE
Demographics also affect Social Security
projections.
The size of the labor force, which is related to the
number of adults between the ages of 20 and 64,
affects Social Security revenues.
Social Security outlays are closely linked to the size
of the population age 65 or older.
Differences in demographics account for
15 percent of the difference between the Trustees’
and CBO’s projections of the 75-year actuarial
balance.
26CONGRESSIONAL BUDGET OFFICE
Increase in Population of Different Age Groups
27CONGRESSIONAL BUDGET OFFICE
These differences reflect different estimates
of three factors: fertility, immigration, and
mortality.
In the Trustees’ projections:
• The total fertility rate is higher than in
CBO’s projections
• The net rate of immigration is lower
• The mortality rate declines slightly more
slowly
28CONGRESSIONAL BUDGET OFFICE
Differences Attributable to
Real Interest Rates
29CONGRESSIONAL BUDGET OFFICE
Interest rates affect measures of the
system’s finances in two ways.
First, they determine interest on balances
in the trust funds.
Second, in the calculation of the actuarial
balance, they are used to compute present
values of future cash flows. A higher
interest rate improves the actuarial
balance.
30CONGRESSIONAL BUDGET OFFICE
In the Trustees’ projections, the average
interest rate on special-issue bonds held in
the trust fund is used as the discount rate.
That rate is higher in the long run than CBO
projects.
Differences in the projections of the interest
rate account for 6 percent of the difference
between the Trustees’ and CBO’s projections
of the 75-year actuarial balance.
31CONGRESSIONAL BUDGET OFFICE
Real Interest Rate Used to Calculate the 75-Year Actuarial
Balance

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Comparing CBO’s Long-Term Projections With Those of the Social Security Trustees

  • 1. Congressional Budget Office Comparing CBO’s Long-Term Projections With Those of the Social Security Trustees Presentation to the Social Security Advisory Board November 18, 2016 Julie Topoleski Health, Retirement, and Long-Term Analysis Division This presentation draws on the testimony of Keith Hall, Director, Congressional Budget Office, before the Subcommittee on Social Security, House Committee on Ways and Means, on September 21, 2016, www.cbo.gov/publication/51988, and Congressional Budget Office, The Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580.
  • 2. 1CONGRESSIONAL BUDGET OFFICE CBO’s long-term Social Security projections are based on a detailed microsimulation model that starts with data about individuals from a representative sample of the population and projects economic and demographic outcomes for that sample over time. Projections of economic and demographic variables are key inputs into that model.
  • 3. 2CONGRESSIONAL BUDGET OFFICE Economic projections are extensions of CBO’s 10-year economic forecast, which underlies the agency’s budget projections. Those economic projections reflect not just historical averages but also trends that many forecasters expect to continue.
  • 4. 3CONGRESSIONAL BUDGET OFFICE CBO consults a variety of sources— including our own analysis of historical data, forecasts made by other government agencies, panels of advisors, and academic literature—when creating our projections. We regularly review our projections, sometimes in light of revised and recent data and sometimes in light of recent analyses.
  • 5. 4CONGRESSIONAL BUDGET OFFICE CBO’s Projection of the 75-Year Actuarial Balance Is Larger Than the Trustees’ Projection
  • 6. 5CONGRESSIONAL BUDGET OFFICE Two-Thirds of the Difference Is Explained by Different Projections of Four Major Inputs
  • 7. 6CONGRESSIONAL BUDGET OFFICE The Effect on the 75-Year Actuarial Balance of Adopting Each of the Trustees’ Major Inputs a. The key components of nominal GDP growth are the labor force participation rate, the unemployment rate, the rate of productivity growth, and the inflation rate. b. Other changes include the differences in estimated income taxes paid on Social Security benefits and the interactions among the four major inputs.
  • 8. 7CONGRESSIONAL BUDGET OFFICE Like the actuarial balance, outlays and revenues as a percentage of GDP are useful measures of the system’s finances. Over the next 75 years, CBO projects, Social Security’s outlays as a percentage of GDP will be higher, and revenues will be lower, than the Trustees project.
  • 9. 8CONGRESSIONAL BUDGET OFFICE Social Security Tax Revenues and Outlays
  • 10. 9CONGRESSIONAL BUDGET OFFICE Differences Between CBO’s and the Social Security Trustees’ Projections of Tax Revenues and Outlays in 2090
  • 11. 10CONGRESSIONAL BUDGET OFFICE Four Major Inputs That Affect Social Security Projections ■ Earnings subject to Social Security payroll taxes ■ Key components of nominal GDP growth ■ Demographics—fertility, mortality, and immigration ■ Real interest rates
  • 12. 11CONGRESSIONAL BUDGET OFFICE Differences Attributable to Earnings Subject to Social Security Payroll Taxes
  • 13. 12CONGRESSIONAL BUDGET OFFICE The amount of earnings subject to Social Security payroll taxes, as a percentage of GDP, depends largely on the share of total earnings that is at or below the taxable maximum, the share of total compensation that is paid as earnings, and total compensation as a share of GDP. Differences in the projection of the amount of earnings subject to the payroll tax account for 23 percent of the difference between CBO’s and the Trustees’ projections of the 75-year actuarial balance.
  • 14. 13CONGRESSIONAL BUDGET OFFICE Share of Covered Earnings Below Social Security’s Taxable Maximum
  • 15. 14CONGRESSIONAL BUDGET OFFICE CBO’s projections of the share of earnings below the maximum taxable amount ($118,500 in 2016) are made on the basis of its projections of the entire distribution of compensation. Those projections reflect an expectation that earnings will grow faster for higher-income people than for others during the next decade—as they have over the past several decades—and at similar rates thereafter. (The projections underlie the agency’s revenue projections.)
  • 16. 15CONGRESSIONAL BUDGET OFFICE Share of Wage and Salary Income Earned by the Top 1 Percent of Earners
  • 17. 16CONGRESSIONAL BUDGET OFFICE Projections of earnings as a share of compensation reflect trends in the cost of health insurance and incorporate expected responses to future taxes on health insurance. Projections of compensation as a share of GDP reflect the distribution of income among various categories, such as labor income and domestic economic profits. (CBO revisits its projections as part of the development of each baseline forecast; the next revision will occur in January 2017.)
  • 18. 17CONGRESSIONAL BUDGET OFFICE Differences Attributable to Key Components of Nominal GDP Growth
  • 19. 18CONGRESSIONAL BUDGET OFFICE The size of the economy affects Social Security revenues and spending. When nominal GDP is larger, Social Security receives more revenues initially, and then later—when beneficiaries retire—it pays higher benefits. Larger nominal GDP improves the actuarial balance because earlier years receive greater weight in the calculation of that balance. Differences in the projection of factors affecting nominal GDP account for 22 percent of the difference between CBO’s and the Trustees’ projections of the actuarial balance.
  • 21. 20CONGRESSIONAL BUDGET OFFICE Four key components affect nominal GDP growth: • Labor force participation rates • Unemployment • Productivity growth • Inflation The most important is labor force participation.
  • 22. 21CONGRESSIONAL BUDGET OFFICE Labor Force Participation Rate
  • 23. 22CONGRESSIONAL BUDGET OFFICE The Trustees’ projection of GDP growth: • Suggests stronger productivity growth than CBO’s does through the mid-2040s. • Shows faster growth in prices than CBO’s does.
  • 24. 23CONGRESSIONAL BUDGET OFFICE The Trustees also project that the unemployment rate will stabilize at a rate significantly above the current rate. In contrast, CBO projects that it will stay roughly unchanged. (This slightly offsets other factors that make the Trustees’ projection of nominal GDP higher than CBO’s.)
  • 25. 24CONGRESSIONAL BUDGET OFFICE Differences Attributable to Demographics
  • 26. 25CONGRESSIONAL BUDGET OFFICE Demographics also affect Social Security projections. The size of the labor force, which is related to the number of adults between the ages of 20 and 64, affects Social Security revenues. Social Security outlays are closely linked to the size of the population age 65 or older. Differences in demographics account for 15 percent of the difference between the Trustees’ and CBO’s projections of the 75-year actuarial balance.
  • 27. 26CONGRESSIONAL BUDGET OFFICE Increase in Population of Different Age Groups
  • 28. 27CONGRESSIONAL BUDGET OFFICE These differences reflect different estimates of three factors: fertility, immigration, and mortality. In the Trustees’ projections: • The total fertility rate is higher than in CBO’s projections • The net rate of immigration is lower • The mortality rate declines slightly more slowly
  • 29. 28CONGRESSIONAL BUDGET OFFICE Differences Attributable to Real Interest Rates
  • 30. 29CONGRESSIONAL BUDGET OFFICE Interest rates affect measures of the system’s finances in two ways. First, they determine interest on balances in the trust funds. Second, in the calculation of the actuarial balance, they are used to compute present values of future cash flows. A higher interest rate improves the actuarial balance.
  • 31. 30CONGRESSIONAL BUDGET OFFICE In the Trustees’ projections, the average interest rate on special-issue bonds held in the trust fund is used as the discount rate. That rate is higher in the long run than CBO projects. Differences in the projections of the interest rate account for 6 percent of the difference between the Trustees’ and CBO’s projections of the 75-year actuarial balance.
  • 32. 31CONGRESSIONAL BUDGET OFFICE Real Interest Rate Used to Calculate the 75-Year Actuarial Balance