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Consideration of proposals to reform Social Security must take into account the uncertainty in any forecast of Social Security's finances--especially over the 75-year time frame used by the program's trustees. This Congressional Budget Office (CBO) paper provides an overview of that uncertainty. It discusses how the Social Security Administration (SSA) projects the program's finances and illustrates their uncertainty. Then, using time-series analysis of historical data and CBO's new Long-Term Actuarial Model, the paper provides quantitative estimates of the program's uncertainty. Those estimates include ranges of probability for the economic and demographic variables that underlie SSA's projections as well as for Social Security's finances over 75 years.

Noah Meyerson, John Sabelhaus, Michael Simpson, and Joel Smith of CBO's Long-Term Modeling Group (LTMG) wrote the paper. Along with Amy Rehder Harris and Josh O'Harra of LTMG, they also developed the Long-Term Actuarial Model. Paul Burnham, Bob Dennis, Doug Hamilton, Arlene Holen, Steve Lieberman, Deborah Lucas, and Ralph Smith of CBO reviewed the paper and provided helpful comments, as did members of CBO's Long-Term Modeling Advisory Group.

Many analysts in SSA's Office of the Chief Actuary gave a great deal of time to help CBO understand the agency's projection techniques. This project would not have been possible without their assistance.

Joseph Foote and Christian Spoor edited the paper, and Christine Bogusz proofread it. Kathryn Winstead produced the cover, Lenny Skutnik produced the printed copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.

Dan L. Crippen
Director
December 2001
 
 

SUMMARY

ONE - INTRODUCTION

• Goals for Studying Trust Fund Uncertainty
• How Assumptions About Inputs Determine Social Security's Projected Finances
• What Types of Uncertainty Are Not Being Captured?

TWO - SOCIAL SECURITY'S INTERMEDIATE PROJECTIONS

• Demographic Inputs and Population Projections
• Economic Inputs
• Projecting Social Security's Finances Using the Long-Term Actuarial Model

THREE - EVALUATING UNCERTAINTY USING HIGH-COST AND LOW-COST SCENARIOS

• SSA's Ranges of Values for Input Assumptions
• How Varying the Input Assumptions Affects Social Security's Projected Finances
• Concerns About the Scenario-Based Approach

FOUR - MEASURING UNCERTAINTY ABOUT INPUT ASSUMPTIONS

• Producing a Forecast with Time-Series and Monte Carlo Techniques
• Probability Distributions for Demographic and Economic Inputs

FIVE - UNCERTAINTY ABOUT SOCIAL SECURITY'S LONG-TERM FINANCES

• Base-Case Estimates of Trust Fund Uncertainty
• Sources of Trust Fund Variability
• The Effect of Random Changes in the Central Tendency for Fertility
• The Effect of Using Bootstrapped Random Shocks

APPENDIX - ESTIMATES OF TIME-SERIES EQUATIONS FOR INPUT ASSUMPTIONS
 

TABLES
S-1.	Estimated Uncertainty About Trust Fund Outcomes
1.	The Social Security Administration's Ranges of Ultimate Values for Nine Primary Inputs
2.	Sensitivity of Social Security's 75-Year Actuarial Balance to Changes in Ultimate Input Values
3.	Sensitivity of Social Security's Annual Actuarial Balances to Changes in Ultimate Input Values
4.	Ranges of Uncertainty for Inputs
5.	Estimated Uncertainty About Trust Fund Outcomes in CBO's Base Case
6.	Sources of Uncertainty About Social Security's Finances
7.	Estimated Uncertainty About Trust Fund Outcomes Assuming Random Changes in the Central Tendency for Fertility
8.	Estimated Uncertainty About Trust Fund Outcomes Using Bootstrapped Random Shocks
A-1.	Estimated Coefficients for Mortality Reductions
A-2.	Estimated Coefficients for CBO's Economic Model
FIGURES
S-1.	Probability Distribution of the Balance of the Social Security Trust Funds
1.	How Inputs Affect the Balance of the Social Security Trust Funds in CBO's Long-Term Actuarial Model
2.	Intermediate Projections for the Overall Rate of Fertility
3.	Intermediate Projections for the Overall Rate of Mortality Improvement
4.	Intermediate Projections for the Level of Immigration
5.	Intermediate Projections for the Rate of Real Wage Growth
6.	Intermediate Projections for the Inflation Rate
7.	Intermediate Projections for the Unemployment Rate
8.	Intermediate Projections for the Real Interest Rate on Assets in the Social Security Trust Funds
9.	Intermediate Projections for the Rate of Disability Incidence
10.	Intermediate Projections for the Rate of Disability Termination
11.	Uncertainty Bands for the Rate of Real Wage Growth
12.	Uncertainty Bands for the Overall Rate of Mortality Improvement
13.	Uncertainty Bands for the Unemployment Rate
14.	Uncertainty Bands for the Inflation Rate
15.	Uncertainty Bands for the Real Interest Rate on Assets in the Social Security Trust Funds
16.	Uncertainty Bands for the Level of Immigration
17.	Uncertainty Bands for the Rate of Disability Incidence
18.	Uncertainty Bands for the Rate of Disability Termination
19.	Uncertainty Bands for the Overall Rate of Fertility
20.	Uncertainty Bands for the Overall Rate of Fertility Using the First-Differenced Specification
21.	Probability Distribution of the Balance of the Social Security Trust Funds
22.	Probability Distribution of the Balance of the Social Security Trust Funds Assuming Random Changes in Central Tendency for Fertility

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