Evaluating Social Security Reforms using Probabilistic Population Forecasts in a Life-cycle Model of Social Insurance

Published: 2006
Project ID: UM06-17


The extent of the Social Security crisis, defined by the depletion of the trust fund and the long-run sustainability of the system, depends on a set of demographic and economic assumptions. A scenario-based approach is commonly considered in order to get a rough feel for the magnitudes of the uncertainties involved. A probabilistic approach, has been recently developed and used by researchers and the Social Security Administration (SSA). The proposed research would embed a new type of stochastic population projection model in a life-cycle economic model of retirement. The part of the model that uses the stochastic projection method extends this method by allowing error adjustments in time-series forecasts. The new economic model will account for the set of incentives from Social Security; will analyze labor supply, savings, and consumption decisions; and will provide a framework for policy evaluation and policy analysis. It will provide policymakers with a more realistic view of the pending crisis and the consequences of a variety of reforms. The project will also simulate various policy reforms, including indexation of the early and normal retirement ages to newly developed measures of longevity.