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Stochastic Infinite Horizon Forecasts for US Social Security Finances

Demography and Economics, University of California, Berkeley, rlee{at}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{at}comcast.net

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.

Key Words: Social security • sustainable • infinite horizon • stochastic • forecast

National Institute Economic Review, Vol. 194, No. 1, 82-93 (2005)
DOI: 10.1177/0027950105061498


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