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Stochastic Infinite Horizon Forecasts for Social Security and Related Studies

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  • Ronald Lee
  • Timothy Miller
  • Michael Anderson

Abstract

This paper consists of three reports on stochastic forecasting for Social Security, on infinite horizons, immigration, and structural time series models. 1) In our preferred stochastic immigration forecast, total net immigration drops from current levels down to about one million by 2020, then slowly rises to 1.2 million at the end of the century, with 95% probability bounds of 800,000 to 1.8 million at the century's end. Adding stochastic immigration makes little difference to the probability distribution of the old age dependency ratio. 2) We incorporate parameter uncertainty, stochastic trends, and uncertain ultimate levels in stochastic models of wage growth and fertility. These changes sometimes substantially affect the probability distributions of the individual input forecasts, but they make relatively little difference when embedded in the more fully stochastic Social Security projection. 3) Using a 500-year stochastic projection, we estimate an infinite horizon balance of -5.15% of payroll, compared to the -3.5% of the 2004 Trustees Report, probably reflecting different mortality projections. Our 95% probability interval bounds are -10.5 and -1.3%. Such forecasts, which reflect only "routine" uncertainty, have many problems but nonetheless seem worthwhile.

Suggested Citation

  • Ronald Lee & Timothy Miller & Michael Anderson, 2004. "Stochastic Infinite Horizon Forecasts for Social Security and Related Studies," NBER Working Papers 10917, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10917
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    References listed on IDEAS

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    1. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-241, May.
    2. Lee, Ronald & Yamagata, Hisashi, 2003. "Sustainable Social Security: What Would It Cost?," National Tax Journal, National Tax Association, vol. 56(1), pages 27-43, March.
    3. Ronald Lee & Shripad Tuljapurkar, 1998. "Stochastic Forecasts for Social Security," NBER Chapters,in: Frontiers in the Economics of Aging, pages 393-428 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 16-27, February.
    2. Todd E. Clark & Taisuke Nakata, 2006. "The trend growth rate of employment : past, present, and future," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-85.
    3. 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.

    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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