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Could stochastic modeling help Social Security actuaries achieve more accurate forecasts than traditional deterministic methods?

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Could stochastic modeling help Social Security actuaries achieve more accurate forecasts than traditional deterministic methods?

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It’s an idea they’ve been looking at for a few years. Here, in a different context, is basically how stochastic modeling works. IN 2003, the Social Security trustees began including, as an appendix to their annual report on the system’s financial condition, the results of stochastic projections of the system’s long-range finances in an effort to illustrate the uncertainty of the results of the traditional deterministic valuation using the intermediate (best estimate) assumption set. Any time we talk about mathematical modeling, we’re talking about some type of system in which behavior can be abstracted in a way that allows meaningful analysis. Let’s take the example of a thrift or 401(k) savings plan that currently contains $1,000. Suppose we’re interested in determining what the balance would be five years from now, assuming no additional contributions. Before we proceed, it’s important to note that this example is not intended to demonstrate how the actuaries in the Social Security A

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