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Stochastic Infinite Horizon Forecasts for US Social Security Finances

Author

Listed:
  • Ronald Lee

    (Demography and Economics, University of California, Berkeley, rlee@demog.berkeley.edu)

  • Michael Anderson

    (Centre for the Economics and Demography of Aging, University of California at Berkeley, 2232 Piedmont Avenue, Berkeley, CA 94720-2120, mikeand1@comcast.net)

Abstract

Even over a 75-year horizon, forecasts of PAYGO pension finances are misleadingly optimistic. Infinite horizon forecasts are necessary, but are they possible? We build on earlier stochastic forecasts of the US Social Security trust fund which model key demographic and economic variables as historical time series, and use the fitted models to generate Monte Carlo simulations of future fund performance. Using a 500-year stochastic projection, effectively infinite with discounting, we find a fund balance of -5.15 per cent of payroll, compared to the -3.5 per cent of the 2004 Trustees' Report, probably reflecting different mortality projections. Our 95 per cent probability bounds are -10.5 and -1.3 per cent. Such forecasts, which reflect only ‘routine’ uncertainty, have many problems but nonetheless seem worthwhile.

Suggested Citation

  • Ronald Lee & Michael Anderson, 2005. "Stochastic Infinite Horizon Forecasts for US Social Security Finances," National Institute Economic Review, National Institute of Economic and Social Research, vol. 194(1), pages 82-93, October.
    • Handle: RePEc:sae:niesru:v:194:y:2005:i:1:p:82-93
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    Cited by:

    1. Alex Armstrong & Nick Draper & Ed Westerhout, 2008. "The impact of demographic uncertainty on public finances in the Netherlands," CPB Discussion Paper 104, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Alex Armstrong & Nick Draper & Ed Westerhout, 2008. "The impact of demographic uncertainty on public finances in the Netherlands," CPB Discussion Paper 104.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Dr Martin Weale, 2011. "Generational Accounts for the United Kingdom," National Institute of Economic and Social Research (NIESR) Discussion Papers 377, National Institute of Economic and Social Research.
    4. Ermisch, John, 2008. "Population ageing: crisis or opportunity?," ISER Working Paper Series 2008-38, Institute for Social and Economic Research.
    5. L. Randall Wray, 2006. "The Burden Of Aging: Much Ado About Nothing, Or Little To Do About Something?," Economics Policy Note Archive 06-5, Levy Economics Institute.

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