Statistical Security for Social Security

Citation:

Soneji, Samir, and Gary King. 2012. Statistical Security for Social Security, Demography 49, no. 3: 1037-1060 . Copy at http://j.mp/Qvla7N
Article1.07 MB

Abstract:

The financial viability of Social Security, the single largest U.S. Government program, depends on accurate forecasts of the solvency of its intergenerational trust fund. We begin by detailing information necessary for replicating the Social Security Administration’s (SSA’s) forecasting procedures, which until now has been unavailable in the public domain. We then offer a way to improve the quality of these procedures due to age-and sex-specific mortality forecasts. The most recent SSA mortality forecasts were based on the best available technology at the time, which was a combination of linear extrapolation and qualitative judgments. Unfortunately, linear extrapolation excludes known risk factors and is inconsistent with long-standing demographic patterns such as the smoothness of age profiles. Modern statistical methods typically outperform even the best qualitative judgments in these contexts. We show how to use such methods here, enabling researchers to forecast using far more information, such as the known risk factors of smoking and obesity and known demographic patterns. Including this extra information makes a sub¬stantial difference: For example, by only improving mortality forecasting methods, we predict three fewer years of net surplus, $730 billion less in Social Security trust funds, and program costs that are 0.66% greater of projected taxable payroll compared to SSA projections by 2031. More important than specific numerical estimates are the advantages of transparency, replicability, reduction of uncertainty, and what may be the resulting lower vulnerability to the politicization of program forecasts. In addition, by offering with this paper software and detailed replication information, we hope to marshal the efforts of the research community to include ever more informative inputs and to continue to reduce the uncertainties in Social Security forecasts.

This work builds on our article that provides forecasts of US Mortality rates (see King and Soneji, The Future of Death in America), a book developing improved methods for forecasting mortality (Girosi and King, Demographic Forecasting), all data we used (King and Soneji, replication data sets), and open source software that implements the methods (Girosi and King, YourCast).  Also available is a New York Times Op-Ed based on this work (King and Soneji, Social Security: It’s Worse Than You Think), and a replication data set for the Op-Ed (King and Soneji, replication data set).

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