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CBO’s Long-Term Projections of Labor Force Participation Rates

Presentation by Julie Topoleski, the director of CBO’s Labor, Income Security, and Long-Term Analysis Division, at the NBER’s Summer Institute 2023: Economics of Social Security.

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Presentation at the NBER’s Summer Institute 2023:
Economics of Social Security
July 26, 2023
Julie Topoleski
Labor, Income Security, and Long-Term Analysis Division
CBO’s Long-Term Projections of
Labor Force Participation Rates
For information about the conference, see www.nber.org/conferences/si-2023-economics-social-security.
1
CBO prepares, and periodically updates, a budget baseline that serves as a
benchmark for measuring the effects of proposed legislation. That baseline spans
the next 10 years.
The baseline, which reflects the assumption that current laws governing spending
and revenues generally remain unchanged, relies on CBO’s forecasts of key
economic factors, including labor force participation rates.​
CBO is required to produce a formal cost estimate for nearly every bill approved
by a full Congressional committee. The agency also fulfills thousands of requests
for technical assistance as lawmakers draft legislation.
CBO’s Baseline Budget Projections and Cost Estimates
2
Congressional Budget Office, The 2023 Long-Term Budget Outlook (June 2023), www.cbo.gov/publication/59014, and CBO’s 2023 Long-Term Projections for Social Security
(June 2023), www.cbo.gov/publication/59184.
CBO provides the Congress with long-term budget projections that extend
20 years beyond the standard 10-year period. Those projections show the
estimated effects of demographic trends, economic developments, and health
care costs on federal spending, revenues, deficits, and debt over the next
30 years.
CBO publishes an annual report that provides long-term projections for the Social
Security system. Those projections span 75 years—the same projection period
that the Social Security trustees use in their annual report.
CBO’s Long-Term Projections
3
Some examples of data sources that CBO uses regularly are the national income and product accounts, surveys of labor market conditions and prices, the Statistics of Income
database, the Current Population Survey, the Survey of Income and Program Participation, data on national health expenditures, various health care surveys, and data on financial
transactions.
All of CBO’s work reflects the agency’s objective, impartial, and nonpartisan
analytical assessments. Those assessments are based on several factors:
▪ A detailed understanding of federal programs and revenue sources;
▪ Careful reading of the relevant research literature;
▪ Extensive analysis of data collected and reported by the government’s
statistical agencies and by private organizations; and
▪ Consultation with numerous outside experts, including professors, think-tank
analysts, representatives of industry groups, other private-sector experts, and
employees of federal, state, and local governments.
The demographic and economic projections that CBO uses in its Social Security
analysis are consistent with those that it uses to produce its baseline projections
and for other purposes.
Independent Analysis
4
Congressional Budget Office, CBO’s 2023 Long-Term Projections for Social Security (June 2023), www.cbo.gov/publication/59184.
Social Security Outlays and Revenues, With Scheduled Benefits
In CBO’s projections, the gap
between Social Security’s
outlays and revenues widens
over the long term. Total
spending on the program in
2023 is equal to 5.2 percent of
GDP; by 2097, spending on
the program reaches
7.0 percent of GDP. Over the
same period, revenues remain
at about 4.6 percent of GDP.
5
Labor Force Participation Rates, 1970 to 2097
The aging of the population
continues to be the main
driver of the decline in labor
force participation in CBO’s
projections, but it is not the
only factor affecting those
projections. Some factors,
such as increases in
educational attainment and
life expectancy, tend to
increase labor force
participation and thus
partially offset the effects of
the aging of the population.
But other factors, along with
aging, push down CBO’s
projections of labor force
participation.
Percent
40
45
50
55
60
65
70
75
80
85
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090
All Women Men

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CBO’s Long-Term Projections of Labor Force Participation Rates

  • 1. Presentation at the NBER’s Summer Institute 2023: Economics of Social Security July 26, 2023 Julie Topoleski Labor, Income Security, and Long-Term Analysis Division CBO’s Long-Term Projections of Labor Force Participation Rates For information about the conference, see www.nber.org/conferences/si-2023-economics-social-security.
  • 2. 1 CBO prepares, and periodically updates, a budget baseline that serves as a benchmark for measuring the effects of proposed legislation. That baseline spans the next 10 years. The baseline, which reflects the assumption that current laws governing spending and revenues generally remain unchanged, relies on CBO’s forecasts of key economic factors, including labor force participation rates.​ CBO is required to produce a formal cost estimate for nearly every bill approved by a full Congressional committee. The agency also fulfills thousands of requests for technical assistance as lawmakers draft legislation. CBO’s Baseline Budget Projections and Cost Estimates
  • 3. 2 Congressional Budget Office, The 2023 Long-Term Budget Outlook (June 2023), www.cbo.gov/publication/59014, and CBO’s 2023 Long-Term Projections for Social Security (June 2023), www.cbo.gov/publication/59184. CBO provides the Congress with long-term budget projections that extend 20 years beyond the standard 10-year period. Those projections show the estimated effects of demographic trends, economic developments, and health care costs on federal spending, revenues, deficits, and debt over the next 30 years. CBO publishes an annual report that provides long-term projections for the Social Security system. Those projections span 75 years—the same projection period that the Social Security trustees use in their annual report. CBO’s Long-Term Projections
  • 4. 3 Some examples of data sources that CBO uses regularly are the national income and product accounts, surveys of labor market conditions and prices, the Statistics of Income database, the Current Population Survey, the Survey of Income and Program Participation, data on national health expenditures, various health care surveys, and data on financial transactions. All of CBO’s work reflects the agency’s objective, impartial, and nonpartisan analytical assessments. Those assessments are based on several factors: ▪ A detailed understanding of federal programs and revenue sources; ▪ Careful reading of the relevant research literature; ▪ Extensive analysis of data collected and reported by the government’s statistical agencies and by private organizations; and ▪ Consultation with numerous outside experts, including professors, think-tank analysts, representatives of industry groups, other private-sector experts, and employees of federal, state, and local governments. The demographic and economic projections that CBO uses in its Social Security analysis are consistent with those that it uses to produce its baseline projections and for other purposes. Independent Analysis
  • 5. 4 Congressional Budget Office, CBO’s 2023 Long-Term Projections for Social Security (June 2023), www.cbo.gov/publication/59184. Social Security Outlays and Revenues, With Scheduled Benefits In CBO’s projections, the gap between Social Security’s outlays and revenues widens over the long term. Total spending on the program in 2023 is equal to 5.2 percent of GDP; by 2097, spending on the program reaches 7.0 percent of GDP. Over the same period, revenues remain at about 4.6 percent of GDP.
  • 6. 5 Labor Force Participation Rates, 1970 to 2097 The aging of the population continues to be the main driver of the decline in labor force participation in CBO’s projections, but it is not the only factor affecting those projections. Some factors, such as increases in educational attainment and life expectancy, tend to increase labor force participation and thus partially offset the effects of the aging of the population. But other factors, along with aging, push down CBO’s projections of labor force participation. Percent 40 45 50 55 60 65 70 75 80 85 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 All Women Men
  • 7. 6 To assess the importance of aging in its projections of the overall labor force participation rate, CBO calculated what the rate would be if in each year of the projection period the age-and-sex composition of the population remained the same as it was in 2023. Under that hypothetical scenario, the labor force participation rate would increase from 61.9 percent in 2023 to 63.7 percent in 2053—3.4 percentage points higher than the labor force participation rate in that year in CBO’s projections. Thus, CBO estimates that aging causes the labor force participation rate to drop by 3.4 percentage points over the 2023–2053 period—double the 1.7 percentage-point decline in the rate over that period in CBO’s projections. Quantifying the Effect of Aging on Labor Force Participation
  • 8. 7 Number of People in and out of the Labor Force, by Age Group and Year 0 20 40 60 80 100 20-29 30-39 40-49 50-59 60-69 70+ Age Group 2023 In Labor Force Not in Labor Force 0 20 40 60 80 100 20-29 30-39 40-49 50-59 60-69 70+ 2053 In Labor Force Not in Labor Force 0 20 40 60 80 100 20-29 30-39 40-49 50-59 60-69 70+ 2097 In Labor Force Not in Labor Force Millions of People
  • 9. 8 See Joshua Montes, CBO’s Projection of Labor Force Participation Rates, Working Paper 2018-04 (Congressional Budget Office, March 2018), www.cbo.gov/publication/53616. CBO projects rates of labor force participation by using a model that is an extension of those used by Stephanie Aaronson et al. (2006), Kudlyak (2013), Stephanie Aaronson et al. (2014), and Daniel Aaronson et al. (2014). That model is a cohort model that estimates labor force participation rates by age-sex-education-race/ethnicity subgroups. CBO treats age groups within each sex-education-race/ethnicity subgroup as a separate system of equations and estimates cohort effects that are constrained across the age group equations within each system. Those constraints keep the values of the estimated cohort effects the same for all age groups within each system. How CBO Projects Labor Force Participation
  • 10. 9 Each age group equation includes an age group–specific fixed effect, cohort fixed effects, and an array of time-varying covariates. CBO separates cyclical variation in labor force participation rates from underlying structural trends through the time-varying covariates to identify the potential labor force participation rate—that is, the rate that would occur if the economy’s output was at its maximum sustainable amount and other inputs were at their potential rates. How CBO Projects Labor Force Participation (Continued)
  • 11. 10 In the future, will the relationships between labor force participation and age, education, and immigration status be similar to those in the past? Will the relationships between labor force participation and changes to tax policy and transfer programs be similar to those in the past? Will the relationships between data about earnings from payrolls and survey measures of labor force participation be similar to those in the past? Can a more parsimonious and tractable model than CBO’s current one produce more accurate projections? CBO Is Revisiting How It Projects Labor Force Participation