Social Security?: It’s Stochastic!!
Give me some help here. With the 2003 Social Security Report the Trustees launched a new measure for evaluating the strength of their projections going forwards. And it can be found here: Appendix E. STOCHASTIC PROJECTIONS
The Trustees Report has traditionally shown additional estimates using a low cost and a high cost set of specified assumptions to reflect the presence of uncertainty. These additional estimates provide a range of possible outcomes for the projections. However, they provide no indication of the probability that actual future experience will be inside or outside the range of these estimates. For the first time, this Trustees Report presents the results of a new model, based on stochastic modeling techniques, that estimates a probability distribution of future outcomes of the financial status of the combined OASI and DI Trust Funds. It should be noted that this model is in its first stage of development. Future improvements and refinements to the model are expected. In particular, future revisions are expected to reflect a fuller range of uncertainty about the future, as is discussed below.
Well okay. But then we get this from the 2008 Report E. STOCHASTIC PROJECTIONS
Each of the 5,000 simulations is determined by allowing the above variables to vary throughout the long-range period. The fluctuation in each variable is projected by using standard time-series model ing, a method designed to help make inferences based on historical data. Generally, each variable is modeled by an equation that captures a relation ship between current and prior years’ values of the variable and introduces year-by-year random variation, as reflected in the historical period. For some variables, the equations additionally reflect relationships with other vari ables. Parameters for the equations are estimated using historical data for periods between 20 years and 110 years depending on the nature and quality of data available. Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions.
Hmm. Okay again. I am just a peasant here. But can anyone explain in slow terms why exactly this is a test of Intermediate Cost assumptions rather than a somewhat gratutious explanation why simple statisical variation is unlikely to carry us to Low Cost outcomes? Thanks in advance.