Working Paper: NBER ID: w10917
Authors: 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.
Keywords: Stochastic Forecasting; Social Security; Immigration; Dependency Ratio
JEL Codes: H0; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| immigration rates (J11) | old-age dependency ratio (J14) |
| stochastic immigration forecasts (J11) | old-age dependency ratio (J14) |
| parameter uncertainty in wage growth and fertility models (J19) | uncertainty of forecasts (C53) |
| parameter uncertainty in wage growth and fertility models (J19) | social security projections (H55) |
| different mortality projections (J11) | infinite horizon balance of social security (H55) |