The 2020 Long-Term Budget Outlook

Growth of Real Earnings per Worker. Projections of prices, nonwage compensation (such as employment-based health insurance), average hours worked, and labor productivity (discussed below) imply that real earnings per worker grow by an average of 1.0 percent annually over the 2020–2050 period. That rate is lower than the 1.1 percent average annual growth of real earnings per worker over the last 30 years.

Distribution of Earnings. In CBO’s projections, earnings grow faster for higher earners than for lower earners. As a result, the share of earnings accruing to workers in the top 10 percent of the earnings distribution increases at an average rate of 0.2 percent per year. That rate of growth is lower than it was between 1978 and 2018, when the share of earnings accruing to workers in the top 10 percent of the earnings distribution increased by 0.6 percent per year.

The distribution of earnings affects revenues from income taxes and payroll taxes, among other things. Income taxes are affected by the earnings distribution because of the progressive rate structure of the individual income tax; people with lower income pay a smaller share of their earnings in taxes than people with higher income do.

Social Security payroll taxes are also affected by the earnings distribution. Those taxes are levied only on earnings up to a certain annual amount ($137,700 in 2020). Because earnings have grown more for higher earners than for others, the portion of covered earnings on which Social Security payroll taxes are paid has fallen from 90 percent in 1983 to 83 percent in 2018.12 The portion of earnings subject to Social Security taxes is projected to remain at 83 percent, on average, between 2020 and 2030 and fall to an average of 82 percent in the second decade and to an average of 81 percent in the third decade, equaling 81 percent in 2050. That decline in the share of covered earnings below the taxable maximum reduces the projected balance of the Social Security trust funds.

Changes in Projections of Other Labor Market Outcomes Since Last Year. Several projections of labor market outcomes are different from last year’s projections. CBO’s current projection of the unemployment rate is higher than it was last year in the first five years of the projection period but lower than it was last year in the final two decades of the period. In the first five years of the period, the projected unemployment rate is higher because of the recession caused by the pandemic and the ensuing slow recovery. The projected lower unemployment rate in the second and third decades is largely attributable to the agency’s reassessment of the underlying long-run trend of unemployment. Because CBO now expects the labor force to have a larger percentage of older workers, as well as a larger percentage of more educated workers, CBO lowered its estimate of the underlying long-run trend of unemployment for the projection period.

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