Uncertain policy for an uncertain world: The case of social security

Analysis and discussion of Social Security policy are usually based on expected fiscal and societal outcomes. However, future demographic and economic trends are uncertain, and thus ultimate outcomes for aggregate system financial flows and the distribution of taxes and benefits across generations are uncertain. This paper analyzes a state-dependent approach to policy in which future Social Security benefit formulas are tied to realized economic and demographic outcomes over time. The results, based on a microsimulation model with stochastic capabilities, show the extent to which it is possible to systematically address uncertainty about system finances and distributional outcomes. (c) 2007 by the Association for Public Policy Analysis and Management.