Stochastic Rates of Return for Social Security Under Various Policy Scenarios

Abstract

In this paper, we compute distributions of rates of return by cohort for the Social Security retirement system, using a combination of historical data and stochastic forecasts of productivity and mortality rates. Since our forecasts of productivity and mortality are stochastic, the rate-ofreturn estimates themselves are stochastic; that is, we compute an entire distribution of rates for each cohort. We repeat these calculations under a variety of policy scenarios designed to bring the trust fund into future solvency with roughly 50% probability. This allows us to examine the impact of various schemes on different cohorts. Policies which delay reform the longest and impact taxpayers the greatest dramatically concentrate the impact of reform on the youngest cohorts. Reforms which are more immediate and focused on retirees tend to spread the cost of reform across generations more evenly. Authors’ Acknowledgements This research was funded by a grant from the Michigan Retirement Research Center, which is in turn supported by the Social Security Administration. Some closely related research was also supported by the Center for the Economics and Demography of Aging at U.C. Berkeley, which is supported by the National Institutes of Health.