MRRC Newsletter
Volume 2, Issue 1
March 2001

Director's Corner

With the untimely death of Dr. Lee Lillard, the MRRC is now conducting a
search for a new Director. Dr. F. Thomas Juster will be serving as the Acting
Director. He is a distinguished scholar and researcher who is Senior Research
Scientist Emeritus at the Institute for Social Research and Professor Emeritus at
the University of Michigan. The Survey Research Center is conducting a
national search to identify the new MRRC Director. In the interim, Center
activities will continue as before under the auspices of Dr. Juster.


Chances are ... Stochastic Forecasts of the Social Security Trust Fund and Attempts to Save it
by Michael Anderson, Shripad Tuljapurkar, and Ronald Lee

Regular Features:
Issue in Brief 1
FYI 4
   Retirement
   Age Increasing
 
Inside This Issue:
RRC 2001 Conference Agenda 3
News Notes 4
    Dr. F. Thomas
   Juster named
   MRRC Acting
   Director
      No government benefit program promises to impact the wallets of taxpayers and retirees more than Social Security. Declining mortality and the past baby boom have conspired to create an abundance of workers now on the verge of retirement with fewer workers left to support them. Because Social Security is essentially a pay-as-you-go system, there is little disagreement that this will result in a shortfall in the trust fund, or insolvency. At issue is when insolvency will occur and who will pay for it. Holding constant current policy, the question of when the shortfall will occur depends more on future economic and demographic outcomes. Who will pay depends on which of several available policy options is exercised. In this Issue in Brief, we summarize a forecasting methodology that allows us to evaluate three such options for achieving long-term solvency of the trust fund: raising the normal retirement age (NRA), increasing the payroll taxes, and investing some portion of the fund in the stock market. We note that we do not consider the possibility of creating additional federal debt as a means of fixing the problem. Nor do we address the issue of how the federal government will meet the bond obligations presently held by the SSA, which will be required for benefits starting in 2020.

The Problem
      Knowing what to do to prevent insolvency is largely a problem of uncertainty in forecasting the future. In the system of accounting utilized by the federal government to keep things in balance, there are 4 major sources of uncertainty. The first is demographic. Since we cannot know future mortality, fertility, and immigration rates, it is impossible to know future population distributions exactly. The second, economic uncertainty derives from the fact that real wage growth and interest rates vary substantially from year to year. These two factors are key to determining future taxation and benefits for Social Security. Third, the behavior of workers must be predicted with reasonable accuracy, in particular labor force participation. Last, it is difficult to predict broad economic structural changes that may occur, such as major technological innovations and the globalization of trade--changes that may affect economic factors listed above. In the methodology we describe below, we build a model that incorporates the first three sources of uncertainty (treating immigration and some behavioral patterns as deterministic) in order to evaluate the potential effects of various policy levers on the problem of insolvency.

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