The Future of Social Security: What a Difference Risk Analysis Makes

A report released from the Congressional Budget Office in August provides new projections of Social Security’s financial future.  According to the American Enterprise Institute, the CBO’s estimates differ rather markedly from those done by the Social Security Administration itself in that they predict less deficit.  According to the American Enterprise Institute’s Andrew Biggs, the primary difference between the CBO numbers and the numbers produced the the Social Security Administration, is that the CBO used Monte Carlo simulation to arrive at its results.  (Also, the results are published in Microsoft Excel statistics, which apparently wins favor with policy analysts.)

The question of the financial viability of Social Security is prime example of decision making under uncertainty, as Biggs points out: “There is a great deal of uncertainty in projecting Social Security’s finances out over 75 years or more.  We know the basic economic and demographic building blocks that determine Social Securities finances, but we can’t know for sure the value of each over coming decades.”  While the Social Security trustees’ report dealt with these uncertainties on a high-cost-versus-low-cost basis, the CBO assigned probabilities to uncertain variables.

This is not to say that the CBO projections paint a rosy future in contrast to a gloomy forecast from the Social Security Administration.  It’s a matter of degree. The numbers are still deficit numbers, but as with all Monte Carlo risk analysis results, the possible ranges of variation are accounted for.  

For policy implications of Bigg’s analysis, click here.      

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