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Presentation at the NBER Summer Institute 2024:
Economics of Social Security
July 24, 2024
James Pearce
Tax Analysis Division
CBO’s Projection of the
Distribution of Wage Earnings
For more information about the conference, see www.nber.org/conferences/si-2024-economics-social-security.
1
CBO uses its projection of the earnings distribution to help keep its various
models, projections, and estimates consistent with one another.
Those models include:
§ Individual tax model: income and payroll taxes;
§ Social Security model: payroll taxes and benefit projections; and
§ Health insurance simulation model (HISIM): premium tax credits, Medicaid, and
employer-sponsored health insurance.
CBO’s macroeconomic and population projections are also used throughout the
agency to help keep models, projections, and estimates consistent.
How Does CBO Use Its Projected Wage Earnings Distribution?
2
As defined by CBO, wage earnings equal the sum of federally taxable wages and
employee-paid retirement contributions.
The Social Security Administration (SSA) calls this “net compensation” and
reports detailed distributions for the prior year’s earnings every October.
Wage earnings exclude:
– Employee-paid premiums for employer-sponsored health insurance;
– Employee contributions for flexible spending accounts;
– Employer contributions to retirement accounts; and
– Employer-paid premiums for employer-sponsored health insurance.
Those types of income are generally not observed in W-2 data and are excluded
from the federal income tax and payroll taxes.
How Does CBO Define Wage Earnings?
3
SSA net compensation data can be found online at www.ssa.gov/oact/cola/netcomp.html.
A. B. Atkinson, “Top Incomes in the UK Over the 20th Century,” Journal of the Royal Statistical Society, Series A: Statistics in Society, vol. 168, no. 2 (March 2005), pp. 325–343,
https://doi.org/10.1111/j.1467-985X.2005.00351.x.
SSA Net Compensation Data, 2022
CBO interpolates the shares
of net compensation that
accrue to various parts of
the distribution assuming a
Pareto distribution as
described in Atkinson
(2005).
•
•
•
4
The GDP gap is the ratio of GDP to potential GDP.
CBO projects earnings shares for three subgroups of the top decile of wage
earners:
– The top percentile of earners (P100);
– The next four highest percentiles of earners (P96-99); and
– The remaining five percentiles of earners (P91-95).
CBO uses basic time series regression models that include a time trend and a
measure of the GDP gap to control for cyclicality in the economy.
The share of wage earnings accruing to the bottom nine deciles is a residual.
CBO holds the relative wage earnings shares for each of those deciles constant
in its projections.
CBO’s Projection of the Distribution of Wage Earnings
5
Percent
Share accruing to P100
Share accruing to P96-99
Share accruing to P91-95
Projected
0
10
12
14
16
18
2054
2049
2044
2039
2034
2029
2024
2019
2014
2009
2004
1999
Data source: Congressional Budget Office, using data from SSA.
CBO’s Projection of the Distribution of Wage Earnings, Spring 2024
6
Percent
Projected
0
80
85
90
95
2054
2044
2034
2024
2014
2004
1994
1984
Data source: Congressional Budge Office, using data from Social Security Administration, Annual Statistical Supplement to the Social Security Bulletin, 2023 (November 2023), table
4.B1, www.ssa.gov/policy/docs/statcomps/supplement/2023/.
CBO’s Projection of the Social Security Taxable Ratio, Spring 2024
The Social Security taxable
ratio is the share of work-
related earnings that are
subject to Social Security
taxes and are below the
Social Security taxable
maximum.

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CBO’s Projection of the Distribution of Wage Earnings

  • 1. Presentation at the NBER Summer Institute 2024: Economics of Social Security July 24, 2024 James Pearce Tax Analysis Division CBO’s Projection of the Distribution of Wage Earnings For more information about the conference, see www.nber.org/conferences/si-2024-economics-social-security.
  • 2. 1 CBO uses its projection of the earnings distribution to help keep its various models, projections, and estimates consistent with one another. Those models include: § Individual tax model: income and payroll taxes; § Social Security model: payroll taxes and benefit projections; and § Health insurance simulation model (HISIM): premium tax credits, Medicaid, and employer-sponsored health insurance. CBO’s macroeconomic and population projections are also used throughout the agency to help keep models, projections, and estimates consistent. How Does CBO Use Its Projected Wage Earnings Distribution?
  • 3. 2 As defined by CBO, wage earnings equal the sum of federally taxable wages and employee-paid retirement contributions. The Social Security Administration (SSA) calls this “net compensation” and reports detailed distributions for the prior year’s earnings every October. Wage earnings exclude: – Employee-paid premiums for employer-sponsored health insurance; – Employee contributions for flexible spending accounts; – Employer contributions to retirement accounts; and – Employer-paid premiums for employer-sponsored health insurance. Those types of income are generally not observed in W-2 data and are excluded from the federal income tax and payroll taxes. How Does CBO Define Wage Earnings?
  • 4. 3 SSA net compensation data can be found online at www.ssa.gov/oact/cola/netcomp.html. A. B. Atkinson, “Top Incomes in the UK Over the 20th Century,” Journal of the Royal Statistical Society, Series A: Statistics in Society, vol. 168, no. 2 (March 2005), pp. 325–343, https://doi.org/10.1111/j.1467-985X.2005.00351.x. SSA Net Compensation Data, 2022 CBO interpolates the shares of net compensation that accrue to various parts of the distribution assuming a Pareto distribution as described in Atkinson (2005). • • •
  • 5. 4 The GDP gap is the ratio of GDP to potential GDP. CBO projects earnings shares for three subgroups of the top decile of wage earners: – The top percentile of earners (P100); – The next four highest percentiles of earners (P96-99); and – The remaining five percentiles of earners (P91-95). CBO uses basic time series regression models that include a time trend and a measure of the GDP gap to control for cyclicality in the economy. The share of wage earnings accruing to the bottom nine deciles is a residual. CBO holds the relative wage earnings shares for each of those deciles constant in its projections. CBO’s Projection of the Distribution of Wage Earnings
  • 6. 5 Percent Share accruing to P100 Share accruing to P96-99 Share accruing to P91-95 Projected 0 10 12 14 16 18 2054 2049 2044 2039 2034 2029 2024 2019 2014 2009 2004 1999 Data source: Congressional Budget Office, using data from SSA. CBO’s Projection of the Distribution of Wage Earnings, Spring 2024
  • 7. 6 Percent Projected 0 80 85 90 95 2054 2044 2034 2024 2014 2004 1994 1984 Data source: Congressional Budge Office, using data from Social Security Administration, Annual Statistical Supplement to the Social Security Bulletin, 2023 (November 2023), table 4.B1, www.ssa.gov/policy/docs/statcomps/supplement/2023/. CBO’s Projection of the Social Security Taxable Ratio, Spring 2024 The Social Security taxable ratio is the share of work- related earnings that are subject to Social Security taxes and are below the Social Security taxable maximum.