How Accurate are Demographic Projections Used in Forecasting Pension Expenditure?
This paper concerns the nature and role of uncertainty in long-range planning (50 to 75 year horizons) for systems such as public retirement programmes. The majority of such systems are evaluated on the basis of fiscal criteria for long-run sustainability, such as actuarial balance, or long-run adequacy, such as the ability of the system to meet defined obligations. To illustrate uncertainty in concrete terms we will use as an example public retirement systems which combine a pay-as-yougo element with a reserve fund: examples include the US Social Security System, the Canadian Pension Plan, and similar systems in many European countries. In such systems, the balance B(t) in the reserve fund in year t is determined by the interest earnings on existing balances, the inflow of funds into the system from taxes on wages, and the outflow of funds paid to beneficiaries. If we look forward from a particular starting time, the dynamics of the system depend on the future trajectories of wages, the numbers of wage earners and of beneficiaries, and the interest rate earned by the fund. Most people would agree that there is increasing uncertainty over time about all of these trajectories. Our goal here is to illustrate how this uncertainty may be quantified and projected through time, as well as to show how this quantitative assessment may be used by analysts to inform policy makers.
KeywordsTotal Fertility Rate Pension System Labour Force Participation Rate Probability Interval Population Forecast
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