The three alternative sets of economic assumptions project a continuation of the gradual recovery from the recession that started in December 2007. They reflect the Trustees’ consensus expectation of sustained moderate economic growth and their best estimate for various other economic parameters. The low-cost assumptions represent a more optimistic outlook and assume a faster recovery, stronger economic growth, and optimistic levels for other parameters. The high-cost assumptions represent a more pessimistic scenario, beginning with a small second dip to the recession, followed by relatively weak economic growth and pessimistic levels for other parameters.Actual economic data were available through the third quarter of 2011 at the time the Trustees set the assumptions for this report. 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 Trustees project that the economy will return to its sustainable trend level of output within the first 10 years of the projection period and remain on that trend thereafter. However, the speed of the return varies by alternative. The Trustees project that the economy will return to its sustainable trend level of output in 2019 for the intermediate assumptions, 2017 for the low-cost assumptions, and 2021 for the high-cost assumptions, 1 year later than in last year’s report for each alternative. Complete cycles have little effect on the long-range estimates of financial status, so the assumptions do not include economic cycles beyond 10 years.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” denotes 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. Over the last five complete economic cycles (1966-73, 1973-79, 1979-89, 1989-2000, and 2000-07, measured peak to peak), the annual increases in total productivity averaged 2.26, 1.08, 1.30, 1.75 and 2.06 percent, respectively. For the 41-year period from 1966 to 2007, covering those last five complete economic cycles, the annual increase in total-economy productivity averaged 1.68 percent.The Trustees set the ultimate annual increases in total-economy productivity to 1.98, 1.68, and 1.38 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These assumptions are consistent with ultimate annual increases in private non-farm business productivity of 2.39, 2.03, and 1.67 percent. The private non-farm business sector excludes the farm, government, non-profit institution, and private household sectors. These rates of increase are unchanged from the 2011 report, and reflect the belief that recent strong growth in private non‑farm business productivity is consistent with future long-term growth that mirrors the long-term trends of the past.The estimated annual change in total-economy productivity is 0.40 percent for 2011. For the intermediate assumptions, the Trustees assume the annual change in productivity will be 1.09 percent for 2012, then average 2.08 percent for 2013 through 2015, gradually decline to 1.62 percent for 2019 and 2020, and reach its ultimate value of 1.68 percent thereafter. For the low-cost assumptions, the assumed annual change in productivity is 1.44 percent for 2012, averages 2.51 percent for 2013 through 2015, 1.94 percent for 2016 through 2020, and reaches its ultimate value of 1.98 percent thereafter. For the high-cost assumptions, the assumed annual change in productivity is 0.25 percent for 2012, then averages 1.68 percent for 2013 through 2019, and reaches the assumed ultimate value of 1.38 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.The annual increases in the CPI averaged 4.6, 8.5, 5.3, 3.0, and 2.6 percent over the economic cycles 1966-73, 1973-79, 1979-89, 1989-2000, and 2000-07, respectively. The annual increases in the GDP deflator averaged 4.6, 7.7, 4.7, 2.2, and 2.6 percent for the same respective economic cycles. For the 41 years from 1966 to 2007, covering the last five complete economic cycles, the annual increases in the CPI and GDP deflator averaged 4.6 and 4.1 percent, respectively. For 2011, the estimated annual change is 3.7 percent for the CPI and 2.1 percent for the GDP deflator.The Trustees set the ultimate annual increases in the CPI to 1.8, 2.8, and 3.8 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These rates of increase are unchanged from the 2011 report, and reflect a belief that: (1) future shocks that increase inflation will likely be offset by succeeding periods of relatively low inflation; and (2) future monetary policy will be similar to that of the last 20 years, which emphasizes holding the growth rate in prices to relatively low levels.For the intermediate assumptions, the Trustees assume the annual change in the CPI will average 2.0 percent for 2012 through 2015 and then, as the economy moves toward full employment, increase gradually 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 resumed in December 2011, and the Trustees project that they will occur in each subsequent year.For the low-cost assumptions, the Trustees assume the annual change in the CPI will decline from 1.9 percent for 2012 to 1.3 percent for 2013-2014, and then gradually increase until it reaches the ultimate annual change of 1.8 percent for 2019 and later. For the high-cost assumptions, the Trustees assume the annual change in the CPI will increase from 2.2 percent for 2012 until it reaches the ultimate annual change of 3.8 percent for 2019 and later.The ultimate annual increase in the GDP deflator is 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 Trustees assume the price differential will be 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 measure. Accordingly, the Trustees assume the ultimate annual increase in the GDP deflator will 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 ultimate price differentials and GDP deflator growth rates are unchanged from the 2011 report.The estimated price differential is 1.6 percentage points for 2011. Under the intermediate assumptions, the assumed price differential is 0.3 percentage point for 2012. The large change in the price differential between 2011 and 2012 primarily reflects 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. The Trustees assume no future fluctuations in oil prices because such fluctuations are inherently unpredictable. Therefore, the Trustees assume the price differential will be 0.3 percentage point in 2012, 0.5 percentage point in 2013, and then stabilize at 0.4 percentage point in 2014 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 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” denotes the ratio of the sum of total U.S. wage and salary disbursements and net 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 total compensation (which reflects fringe benefits), the ratio of total compensation to GDP, and the GDP deflator.The average annual change in average hours worked was -0.27 percent over the last five complete economic cycles covering the period from 1966 to 2007. The annual change in average hours worked averaged -0.71, -0.56, 0.00, 0.15, and ‑0.63 percent over the economic cycles 1966-73, 1973-79, 1979-89, 1989‑2000, and 2000‑07, respectively.The Trustees set the ultimate annual rates of change for average hours worked at 0.05, -0.05, and -0.15 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These ultimate annual rates of change for average hours worked are 0.05 percentage point lower than in the 2011 report.The average annual change in the ratio of earnings to total compensation was ‑0.21 percent from 1966 to 2007. Most of this decrease was due to the relative increase in employer-sponsored group health insurance for wage workers. Assuming that the level of total employee compensation does not react to 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 employee compensation, including wages. Projections of future ratios of earnings to total compensation follow this principle and are consistent with the year-by-year cost of employer-sponsored group health insurance projected by the Office of the Actuary at the Centers for Medicare and Medicaid Services. This office projects that the total amount of future employer-sponsored group health insurance will 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 this report assumes will grow faster than employee compensation in the future as life expectancy and potential time in retirement increase.The Trustees set the average annual rate of change in the ratio of wages to employee compensation to about -0.03, ‑0.13, and ‑0.23 percent for the low-cost, intermediate, and high-cost assumptions, respectively. Under the intermediate assumptions, the Trustees assume that the ratio of wages to employee compensation will decline from 0.805 for 2011 to 0.735 for 2086. 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 earnings to compensation includes self-employment income and self-employment compensation, which are equal to each other. As a result, the rate of decline in earnings to compensation (which ultimately averages 0.11 under the intermediate assumptions) is less than the rate of decline in wages to employee compensation.The ratio of total compensation (i.e., employee compensation and net proprietor income) to GDP varies over the economic cycle and with changes in the relative sizes of different sectors of the economy. Over the last five economic cycles from 1966 to 2007, this ratio has averaged 0.648. The ratio declined from 0.658 for 2001 to 0.620 for 2010. The Trustees assume that this ratio will rise as the economy recovers, reaching an ultimate level of 0.649 for 2019. For years after 2019, the Trustees assume the relative sizes of different sectors of the economy will remain constant, and therefore project the ratio of total compensation to GDP to remain unchanged.The projected average annual growth rate in average U.S. earnings from 2025 to 2086 is about 3.95 percent for the intermediate alternative. This growth rate reflects the average annual growth rate of approximately ‑0.11 percent for the ratio of earnings to total compensation, and also reflects the assumed ultimate annual growth rates of 1.68, -0.05, and 2.40 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 3.53 percent for the low-cost assumptions and 4.36 percent for the high-cost assumptions.Over long periods, the Trustees expect the average annual growth rate in the average wage in OASDI covered employment (henceforth the “average covered wage”) 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 2025 to 2086 are 3.51, 3.92, and 4.32 percent for the low-cost, intermediate, and high-cost assumptions, respectively. The Trustees estimate that the annual rate of change in the average covered wage is 3.60 percent for 2011. For the intermediate assumptions, as the economy recovers, the Trustees assume the annual rate of change in the average covered wage will average 4.45 percent from 2011 to 2020. Thereafter, the assumed average annual rate of change in the average covered wage is 3.92 percent.4. Assumed Real-Wage DifferentialsThe Trustees have traditionally expressed real increases in the average OASDI covered wage 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 relates closely to assumed growth rates in average earnings and productivity, which previous sections of this chapter present. For the 41-year period including 1967 through 2007, covering the last five complete economic cycles, the real-wage differential averaged 0.91 percentage point, the result of averages of 1.50, 0.02, 0.43, 1.58, and 0.61 percentage points over the economic cycles 1966-73, 1973-79, 1979-89, 1989-2000, and 2000‑07, respectively.For the years 2022‑86, the Trustees assume that the annual real-wage differentials for OASDI covered employment will average 1.71, 1.12, and 0.51 percentage points for the low-cost, intermediate, and high-cost assumptions, respectively.Based on preliminary data, the estimated real-wage differential is ‑0.10 percentage point for 2011. For the intermediate assumptions, the Trustees assume that the real-wage differential will increase from 1.74 percentage points for 2012 to 2.67 percentage points for 2015, an improvement that reflects the economic recovery. Thereafter, the real-wage differential gradually declines to an average of 1.12 percentage points for 2022 and later. For the low-cost assumptions, the real-wage differential increases from 2.65 percentage points for 2012 to 3.42 percentage points for 2014, gradually declines to 1.69 percentage points for 2021, and averages 1.71 percentage points thereafter. For the high-cost assumptions, the real-wage differential increases from 0.12 percentage point for 2012 to 2.39 percentage points for 2016-17, gradually declines to 0.56 percentage point for 2021, and averages 0.51 percentage point thereafter.

Table V.B1.—Principal Economic Assumptions 2011^{c}

For rows with a single year listed, the value is the annual percentage change from the prior year. For rows with a range of years listed, the value is the compound average annual percentage change.

For rows with a single year listed, the value is the annual percentage change in the average annual wage in covered employment less the annual percentage change in the Consumer Price Index. For rows with a range of years listed, the value is the average of annual values of the differential. Values are rounded after all computations.

Historical data are not available for the full year. Estimated values vary slightly by alternative and are shown for the intermediate assumptions.

The Office of the Chief Actuary at the Social Security Administration projects the civilian labor force 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”, which reflects a shift upward in female participation rates for cohorts born through 1948.The annual rate of growth in the labor force decreased from an average of about 2.4 percent during the 1966-73 economic cycle and 2.7 percent during the 1973-79 cycle to 1.7 percent during the 1979-89 cycle, 1.3 percent during the 1989-2000 cycle, and 1.0 percent during the 2000-07 cycle. The Trustees expect further slowing of labor force growth due to a substantial slowing of growth in the working age population in the future — a consequence of the baby-boom generation approaching retirement and succeeding lower-birth-rate cohorts reaching working age. Under the intermediate assumptions, the Office of the Chief Actuary projects that the labor force will increase by an average of 0.8 percent per year from 2012 through 2021 and 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 derive 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 consistent 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. These relationships 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 but 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 attractive early retirement options. 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. The Office of the Chief Actuary models some of these factors directly. To model the effects of other factors related to increases in life expectancy, the office adjusts projected participation rates upward for mid-career and older ages to reflect projected increases in life expectancy. For the intermediate projections, this adjustment increases the total labor force by 3.1 percent for 2086.For men age 16 and over, the projected age-adjusted labor force participation rates^{4}for 2086 are 73.0, 72.7, and 72.5 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These rates are higher than the 2010 level of 71.2 percent because 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 2086 are 61.1, 60.8, and 60.6 percent, for the low-cost, intermediate, and high-cost assumptions, respectively. These rates are higher than the 2010 level of 58.6 percent because of: (1) decreases due to higher assumed disability prevalence rates; (2) increases due to assumed improvements in life expectancy; and (3) 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 2021, the table presents total civilian rates without adjustment for the changing age-sex distribution of the population. For years after 2021, the table presents unemployment rates as age-sex-adjusted rates, using the age-sex distribution of the 2010 civilian labor force. Age-sex-adjusted rates allow for more meaningful comparisons across longer time periods. The effect of age-sex adjustment through 2021 is small.The total civilian unemployment rate reflects the projected levels of unemployment for various age-sex groups of the population. The Office of the Chief Actuary projects each group’s unemployment rate 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 moves toward the ultimate assumed rate as the economy moves toward the long-range sustainable growth path.The Trustees assume that each alternative will reach the ultimate age-sex-adjusted unemployment rate by 2021. 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 unchanged from the 2011 report.6. Gross Domestic Product ProjectionsThe value of real GDP equals the product of three components: (1) average weekly total employment;^{5}(2) productivity; and (3) average hours worked per week. Given this formula, 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 41-year period from 1966 to 2007, which covers the last five complete economic cycles, the average growth rate in real GDP was 3.1 percent. This average growth rate approximately equals the sum of the average growth rates of 1.6, 1.7, and ‑0.3 percent for total employment, productivity, and average hours worked, respectively. As a result of the 2007-09 recession, the real GDP in 2011 was only 0.8 percent above the 2007 level.For the intermediate assumptions, the average annual growth in real GDP is 3.0 percent from 2011 to 2021, the approximate sum of component growth rates of 1.1 percent for total employment, 1.8 percent for productivity, and 0.0 percent for average hours worked. The projected average annual growth in real GDP of 3.0 percent for this period is 0.7 percentage point higher than the underlying sustainable trend rate of 2.3 percent. This 0.7 percentage point above-trend component reflects a relatively rapid increase in employment as the economy recovers and the unemployment rate falls from 9 percent in 2011 to its assumed ultimate level of 5.5 percent in 2019. After 2021, the Trustees do not project any economic cycles. Accordingly, the projected annual growth rate in real GDP combines the projected growth rates for total employment, total U.S. economy productivity, and average hours worked. After 2021, the annual growth in real GDP averages 2.1 percent, based on the assumed ultimate growth rates of 0.5 percent for total employment, 1.7 percent for productivity, and -0.05 percent for average hours worked.For the low-cost assumptions, the annual growth in real GDP averages 3.6 percent over the decade ending in 2021. 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 averages 2.2 percent for the decade ending in 2021.Table V.B2 presents average annual nominal and real interest rates for newly issued trust fund securities. 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” is the annual 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) real yield on securities issuable in the prior year.To develop a reasonable range of assumed ultimate future real interest rates for the three alternatives, the Office of the Chief Actuary examined historical experience for the last five complete economic cycles. For the 41-year period from 1967 to 2007, the real interest rate averaged 2.8 percent per year. The real interest rates averaged 1.3, -1.0, 5.2, 4.0, and 2.2 percent per year over the economic cycles 1967-73, 1974-79, 1980-89, 1990-2000, and 2001-07, respectively. The assumed ultimate real interest rates are 3.4 percent, 2.9 percent, and 2.4 percent for the low-cost, intermediate, and high-cost assumptions, respectively. Compared to the 2011 report, the ultimate real interest rate is unchanged for the intermediate assumptions, 0.2 percentage point lower for the low-cost assumptions, and 0.3 percentage point higher for the high-cost assumptions.^{6}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 5.2 percent for the low-cost assumptions, about 5.7 percent for the intermediate assumptions, and about 6.2 percent for the high-cost assumptions. These nominal rates for newly issued trust fund securities reach their ultimate levels by the end of the short-range period.The actual average annual nominal interest rate was 2.8 percent for 2010, which means that securities newly issued in 2010 would yield 2.8 percent if held 1 year. Estimated average prices rise from 2010 to 2011 by 3.7 percent; therefore, the annual real interest rate for 2011 is -0.9 percent. For the 10-year short-range projection period, projected nominal interest rates depend on changes in the economic cycle and in the CPI. Under the intermediate assumptions, the nominal interest rate rises to the ultimate assumed level of 5.7 percent by 2021. Under the low-cost assumptions, the average annual nominal interest rate reaches an ultimate level of about 5.2 percent by 2021. Under the high-cost assumptions, the rate reaches the ultimate level of about 6.2 percent by 2021.

Table V.B2.—Additional Economic Factors Nominal^{f} Real^{g} 2011^{h}

The Office of the Chief Actuary adjusts the civilian unemployment rates for 2022 and later to the age-sex distribution of the civilian labor force in 2010.

For rows with a single year listed, the value is the annual percentage change from the prior year. For rows with a range of years listed, the value is the compounded average annual percentage change.

The average of the nominal interest rates, which compound semiannually, for special public-debt obligations issuable to the trust funds in each of the 12 months of the year.

Historical data are not available for the full year. Estimated values vary slightly by alternative and are shown for the intermediate assumptions.

Determination of the December 2007 Peak in Economic Activity, Business Cycle Dating Committee, National Bureau of Economic Research. See www.nber.org/cycles/dec2008.html.

See www.nber.org/cycles/sept2010.html.

Historical levels of real GDP are from the Bureau of Economic Analysis’ National Income and Product Accounts. Historical total hours worked is an unpublished series provided by the Bureau of Labor Statistics that includes all U.S. Armed Forces and civilian employment.

The Office of the Chief Actuary adjusts the labor force participation rates to the 2010 age distribution of the civilian noninstitutional U.S. population.

Total employment is the sum of the U.S. Armed Forces and total civilian employment, which depends on the projected total civilian labor force and unemployment rates.

The Trustees narrowed the range of interest rates for three reasons: (1) to reduce the differential effects of interest rates on the ranges of trust fund ratios produced by the alternative scenarios and the stochastic simulations; (2) to make the range more symmetric; and (3) to offset the widening of the range of estimates for the alternative scenarios due to other assumption changes.

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