Overview of the Ultimate 

Economic Assumptions for 

the Trustees Report

Presentation for the SSAB Technical Panel

OCACT

January 25, 2019
Outline

1. Overview of the Economic Assumptions & Model

2. Labor Productivity

3. Labor Share of Output

4. Earnings as a Percentage of Compensation 

5. Average Hours Worked

6. Inflation (CPI and the GDP Deflator)

7. Real Earnings Growth

8. Taxable Ratio 

9. Labor Force, Unemployment, and Employment

10. Real GDP

11. Real Interest Rate

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3
4
5
The Big Picture:

OCACT Economic Model 

Data & Assumptions

Econ Model

Taxable Earnings, 

Covered Employment

6
The Big Picture:

OCACT Economic Model and Beyond

7

• Inputs to the Econ model:

• Economic and demographic data

• OCACT demographic projections

• Economic assumptions

• Output of the Econ model:

• Taxable earnings  payroll tax revenues

• Covered employment

• Used by other OCACT & OACT models to project benefit 

cost and reserves
Two Key Parts of the OCACT 

Economic Model

8

• Employment

• Population, LFPR, unemployment rate

• Average (CPS-style) US employment (quarterly, annual)

• Covered employment at any time during a year

• Earnings

• Employment * avg. hours * productivity = GDP

• GDP * labor share = US compensation

• US compensation – benefits – ECSI = US earnings

• US earnings – non-covered earnings = covered earnings

• Covered earnings * taxable ratio = taxable earnings
Principal Economic Assumptions

9

• Total Economy Labor Productivity (real GDP per hour worked) growth rate

• A key driver of the average real earnings growth rate

• 2018 Trustees Report assumption is a 1.68 percent annual growth rate

• Labor share of output

• The ultimate ratio of compensation to GDP, and thus a key determinant of the ratio of 

earnings to GDP

• The difference between the current and ultimate labor share drives the earnings growth over the short range

• 2018 Trustees Report assumption: 63.1 percent ultimate ratio (0.0 percent ultimate 

growth rate)

• Earnings as a share of compensation growth rate

• Difference includes employer contributions to pensions, health insurance, social insurance 

contributions

• 2018 Trustees Report assumption: -0.06 percent

• Average Hours Worked Per Week

• Contributes to the GDP growth rate

• A driver of the average earnings growth rate

• 2018 Trustees Report assumption: -0.05 percent
Principal Economic Assumptions

10

• Consumer Price Index for Urban Wage Earners (CPIW)

• A key driver of COLA and real earnings growth rate

• 2018 Trustees Report assumption: 2.6 percent growth rate

• Price Differential (GDP Deflator growth-CPIW growth) 

• Differential is due to computational differences and coverage 

differences, each component is assumed to form differential 

• Differential and CPIW form GDP Deflator assumption

• GDP deflator links productivity to nominal earnings growth 

• 2018 Trustees Report assumption: -0.4 percent growth rate

• Growth in average U.S. earnings

• Determined from above assumptions, but labor productivity 

growth rate is the foundation

• 2018 Trustees Report assumption: 3.8 percent growth rate
Additional Economic Assumptions

11

• Share of OASDI covered earnings subject to OASDI 

taxes (Taxable Ratio)

• 2018 Trustees Report assumption: 82.5 percent

• Labor force participation rate (LFPR) and the 

unemployment rate (RU)

• Components of the average US employment

• Key factors in both covered employment and earnings

• Employment is the quantity of interest, so LFPR and RU 

should be considered together

• Determined from OCACT Model

• Real Interest Rate on Trust Fund New Issues

• 2018 Trustees Report assumption: 2.7 percent
Key Considerations

• We have seen recovery in employment since the Great 

Recession, but labor productivity, labor share, average 

earnings, and interest rates have lagged. 

• How to incorporate recent experience into the ultimate 

assumptions

• Was the Great Recession and its aftermath an aberration or 

evidence of new trends? 

• Should we wait for complete business cycle to re-evaluate 

assumptions?

• Important to have a holistic approach to setting 

ultimate assumptions

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Additional Slides

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Productivity Growth Rate

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• No accepted theoretical model on which to base 

projections

• Long-run historical average is useful

• Past sector shifts (FarmNon-Farm) won’t repeat

• Thus we use historical growth rate in Nonfarm 

Business sector productivity as the basis for 

projections

• Assume constant sector weights, zero productivity 

growth for government and non-profit sectors
Historical NFB Productivity Growth Rate

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-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

percent per year

productivity growth

rate

5yr average growth

rate

2018 TR ultimate assumption 2.06%

Average for 65 years (1952-2017) 2.06%
Future Labor Productivity

Optimistic View

• Past productivity slowdowns have been reversed; the current 

slowdown is not permanent

• Future technological advances can result in higher productivity 

growth after a (long) period of adoption and diffusion (Brynjolfsson)

• New technologies not properly accounted for in GDP hide the existing 

productivity growth (Brynjolfsson, Varian, Sichel)

• Estimate of future productivity growth (Branstetter and Sichel, 2017)

• 1.89 to 2.44 

percent per 

year

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Future Labor Productivity

Pessimistic view

• Productivity growth will stay permanently lower, close to 

the recent experience

• Fewer productivity-boosting inventions (Gordon)

• Slower improvement in labor force quality (Jorgenson)

• Estimate of future productivity growth

• 1.20 percent = 

avg growth of output per hour 

for 1970-1994 and 2004-2015 

(1.38 p.p. per year)

less

estimated effect of the slowing 

advance of educational 

attainment (-0.18 p.p.)

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Productivity Growth – Other 

Considerations

• Theoretical link between productivity growth and 

interest rate

• Equilibrium interest rate (return to capital) depends 

on the time discount parameter and the growth 

rate of productivity

• Changes to the ultimate assumptions for 

productivity growth and interest rate should be 

considered together

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Labor Share of GDP

19

0.59

0.6

0.61

0.62

0.63

0.64

0.65

0.66

0.67

0.68

0.69

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 2023 2027

2018 TR ultimate assumption 0.631

Averages:

1947-2007 0.635

1947-2017 0.631

1966-2007 0.627

1966-2017 0.624

2008-2017 0.609

0.631

2018 TR projected
Wage-to-Compensation Ratio

• Compensation of employees comprises taxable 

wages (and salaries and incentives) plus

• Employer-sponsored health insurance (ESHI) premiums

• Employer contributions to retirement funds

• Employer contributions to social insurance programs

• Other non-taxable benefits (small – about 1% of comp.)

• Projections of future changes in wage-to-comp. 

ratio are mostly driven by projections of ESHI costs

• Retirement savings should increase with longevity, 

but decline of DB plans has been the main factor

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Covered Wages vs. NIPA Wages

• Wage earners not covered by OASDI:

• Some state & local government employees

• Federal employees hired before 1983 (closed group)

• Workers in the underground economy

• Certain classes of authorized foreigners

• Certain exempt classes (students working at schools, 

religious exemptions...)

• All self-employment net income is covered... but 

how much of it is reported?

• BEA estimates only ~31% of SE income is reported

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CPI-W Inflation

• Inflation as measured by the CPI-W determines the COLA for 

beneficiaries

• Ultimate assumption for CPI-W inflation in the 2018TR alt 2 

is 2.6 percent

• Historical Average Annual Percentage Change (adjusted):

• 1979-1990: 5.00%

• 1990-2001: 2.45%

• 2001-2007: 2.63%

• 2007-2018: 1.74%

• Average since 2007 low due to severity (and slow recovery 

from “Great Recession”), 2018 back to about 2.6 percent.

• Federal Reserve inflation target of 2.0 percent is based on a 

different measure, Personal Consumption Expenditures 

(PCE), and is lower than CPI-W by about 0.3ppt due to difference in computational methods.

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Price Differential 

• The price differential is the annual growth rate in 

the GDP deflator minus the annual growth rate in 

the CPI-W

• The GDP deflator is used to determine productivity 

which affects wage growth and hence OASDI taxes, 

whereas the CPI-W determines benefits

• Assumed ultimate price differential in 2018TR alt 2 

was -0.4 percentage point, of which

• -0.3 percentage point due to difference in computational 

methods, and

• -0.1 percentage point due to coverage differences

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Real Average Covered Wage Growth

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-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028

percent (annual)

Average Real Wage Growth 

Historical Projected

2018 TR ultimate 

assumption 1.20

Averages:

1962-2007 1.36

1962-2016 1.28

1990-2007 1.37

1990-2016 1.09

2008-2016 0.52
The Taxable Ratio

• The taxable earnings ratio is the ratio of taxable 

earnings (from wages and self-employment) to covered 

earnings subject to the OASDI payroll tax.

• Covered earnings are taxed up to the taxable maximum (also 

known as the contribution and benefit base). For 2019, the 

taxable maximum is $132,900.

• The taxable maximum rises with the national wage index.

• The average wage index (AWI) is the average compensation 

subject to Federal income taxes as reported on Form W-2 and 

includes compensation and employees from non-covered 

employment. 

• For more information on the AWI and the taxable maximum, 

https://www.ssa.gov/oact/COLA/index.html

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The Taxable Ratio

• Stock Options

• Incentive Stock Options (ISO) vs. Nonqualified Stock 

Options (NSO)

• Income from ISOs is not subject to OASDI tax

• Income from the exercise of NSOs is subject to OASDI tax 

and can amplify swings in the taxable ratio due to the 

business cycle

• For example, the steep drop in the taxable ratio in the late 

1990s

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Taxable Ratio: Historical (through 2016) and 

TR2018 projections

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Average Annual Rate of Change

in OASDI Taxable Ratio

1983-2001 -0.34%

2001-2015 -0.14%

2015-2027 -0.02%
OASDI-covered Wages in Excess of 

Taxable Maximum

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Share of Wages Earned by the Top 1% 

of Wage Earners

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Labor Force, Unemployment, and 

Employment

• Projections of covered employment (by age and sex) are 

important for the trust fund actuarial status

• Covered employment determines level of payroll, 

insured population, total level of benefits

• Employment projections are created from the 

projections of the LFPRs and the unemployment rates 

(by age and sex).

• Has the relationship changed?

• The ultimate age-sex-adjusted unemployment rate is 

set by assumption; 

LFPRs are projected by OCACT’s model.

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Labor Force Participation and 

Employment Rate Projections 

Projected LFPRs ultimately depend on:

• The ultimate assumption for the (age-sex specific) 

unemployment rates

• LFPR model equations, which project LFPRs using 

the unemployment rates and other factors 

• Demographic projections

Ratio of employment to population is obtained from 

the projected LFPRs and the projected/assumed 

unemployment rates.

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Projected LFPRs (age-sex adjusted) 

2018 TR (intermediate assumptions)

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Projected Ratio of Employment to Population 

(age-sex-adjusted)

2018 TR (intermediate assumptions)

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History and Projections of Real Interest Rates 

Realized Real Interest Rate on 

Trust Fund New Issues (in first year)

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-4

-2

0

2

4

6

8

10

Percent

Social Security Trust Fund's Realized Real Interest Rate Using Adjusted CPIW

2.7

Historical Projected

3.17

TR2018 Ultimate Assumption 2.7

Average of last five complete

economic cycles (1966-2007) 3.17

Average for the entire period

(1966 - 2017) 2.74

Average 2008-2017 0.93
Real Interest Rate Projection Comparisons

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Year 

Published

CBO Long-Term Budget Outlook (a) OMB 

Budget (b)

Trustees

10 Report (alt 2) th year long-term

2010 3.7 3.0 3.2 2.9

2011 3.1 3.0 3.2 2.9

2012 2.7 3.0 3.2 2.9

2013 2.9 3.0 2.8 2.9

2014 2.6 2.5 2.7 2.9

2015 2.2 2.3 2.2 2.9

2016 1.7 2.3 2.0 2.7

2017 1.2 2.3 1.7 2.7

2018 1.4 2.4 1.5 2.7

(a) CBO's projections for the first 10 years are constrained by the requirement to assume continuation 

of current law. 

(b)The OMB Budget's projected ultimate values published in 2010 - 2018 are from the FY2011 - FY2019 

budgets.
Private Forecasters Real Interest Rate and NFB 

Productivity

• 2018 TR: Real Interest rate 2.7%, NFB productivity growth: 2.1%

• Moody’s Analytics

• 2011 Forecast (2032-2040) Real interest rate: 2.8% NFB productivity growth: 1.6%

• 2017 Forecast (2038-2047) Real interest rate: 1.9% NFB productivity growth: 1.6%

• 2018 Forecast (2039-2048) Real interest rate: 2.2% NFB productivity growth: 1.6%

• IHS Global Insight

• 2011 Forecast (ultimate by 2035)

Real interest rate: 2.8% NFB Productivity growth: 2.1% 

• 2017 Forecast (2038-2047) Real interest rate: 1.7% NFB Productivity growth: 1.6%

• 2018 Forecast (2039-2048) Real interest rate: 1.6% NFB Productivity growth: 1.5%

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