Paper on Stochastic Projections for Social Security Programs

The IAA is pleased to announce the publication by its Social Security Committee of a paper Stochastic Projections of the Financial Experience of Social Security Programs: Issues, Limitations and Alternatives.

Globally, actuaries play a key role in the analysis and projection of the financial condition of social security programs. This paper focuses on issues associated with the quantification and communication of the effect of risk and uncertainty associated with these important government sponsored financial security programs.

There are many challenges in developing social security projections over the long-term, in some cases up to 75 years in the future. One approach that has been increasingly used to provide insight into the uncertainties involved is stochastic modeling that reflects that model variables are not known but exist within some range of probable values. In applying this approach to social security projections, the actuary thus needs to develop assumptions as to these probable ranges regarding the future of the social security programs, including such demographic factors as mortality and fertility, and economic factors such as economic growth and inflation.

Nevertheless, the paper points out that there are several challenges and limitations associated with the stochastic modeling approach that the actuary should keep in mind, especially relating to the development of appropriate probability distributions and covariances among the key assumptions.

Although the focus of the paper is on stochastic modeling, alternative approaches to analyzing and communicating the risks and uncertainties involved are also discussed, such as the use of scenario testing, including the common approach of a high and a low cost scenario.

To learn more about the work of the IAA on this topic, please contact the Chairperson of the Social Security Committee, in care of the IAA Secretariat.