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Chances are...Stochastic Forecasts of the Social Security Trust Fund and Attempts to Save It

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  • Michael Anderson

    (Mountain View Research)

  • Shirpad Tuljapurkar

    (Stanford University)

  • Ronald D. Lee

    (University of California, Berkeley)

Abstract

We present forecasts of the Social Security trust fund, modeling key demographic and economic variables as time series. We evaluate plans for achieving long-term solvency by raising the normal retirement age (NRA), increasing taxes, or investing some portion of the fund in the stock market. Stochastic population trajectories by age and sex are generated using the Lee- Carter and Lee-Tuljapurkar mortality and fertility models. Economic variables are modeled as vector autoregressive processes. With taxes and benefits by age and sex, we obtain inflows to and outflows from the fund over time. Under current legislation, we estimate a 50% chance of insolvency by 2032. Investment in the market cannot keep the median fund solvent, even when the balance stays positive on average. The NRA must be raised to 71 by 2022 for a 66% chance of solvency beyond 2070. Solvency can also be achieved by raising the NRA to 68 by 2020, investing in the market, and increasing taxes one percent.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp008.pdf
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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp008.

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Length: 40 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:mrr:papers:wp008

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  1. Tuljapurkar, Shripad, 1992. "Stochastic population forecasts and their uses," International Journal of Forecasting, Elsevier, vol. 8(3), pages 385-391, November.
  2. Samwick, Andrew A., 1998. "New evidence on pensions, social security, and the timing of retirement," Journal of Public Economics, Elsevier, vol. 70(2), pages 207-236, November.
  3. David A. Wise, 1998. "Frontiers in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise98-1, July.
  4. Shripad Tuljapurkar & Carl Boe, . "Mortality Change and Forecasting: How Much and How Little Do We Know?," Pension Research Council Working Papers 98-2, Wharton School Pension Research Council, University of Pennsylvania.
  5. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-41, May.
  6. Ronald Lee & Shripad Tuljapurkar, 1997. "Death and Taxes: Longer life, consumption, and social security," Demography, Springer, vol. 34(1), pages 67-81, February.
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