Strategies for Incorporating Risk, Uncertainty, and Private Insurance Mechanisms in Models of Social Insurance

This chapter surveys strategies for incorporating various forms of risk and uncertainty into policy models used by the Social Security Administration (SSA). These strategies range from relatively simple modifications to existing microsimulation models that can be implemented relatively quickly and cheaply, to much more substantial long term investments in developing dynamic stochastic overlapping generations general equilibrium models. We classify the relevant types of uncertainties and risks that individuals are concerned about and which SSA might be interested in including in its policy models. This is a somewhat broader classification than anticipated in the RFTOP, but is consistent with SSA’s responsibilities in providing a broad array of social insurance in addition to old age insurance. We stress the importance of developing policy models that account for the key parts of the Social Security program in an integrated fashion. Further, these models should account for other actions individuals can take to insure against risks, including private insurance plans, pensions, savings, and family transfers. However we recognize that in the short term, there is a substantial interest within SSA in developing models that account for risks associated various plans to create “individual accounts” or to invest a share of the Trust Fund in equities. We devote a substantial share of this chapter to this specific issue.