Mathematical Constraints on Financially Viable Public Policy

12 Pages Posted: 13 Feb 2012  

Martin Gremm

Pivot Point Advisors

Mark B. Wise

California Institute of Technology

Date Written: January 5, 2012

Abstract

Social Security and other public policies can be viewed as a series of cash in and outflows that depend on parameters such as the age distribution of the population and the retirement age. Given forecasts of these parameters, policies can be designed to be financially stable, i.e., to terminate with a zero balance. If reality deviates from the forecasts, policies normally terminate with a surplus or a deficit. We derive constraints on the cash flows of robust policies that terminate with zero balance even in the presence of forecasting errors. Social Security and most similar policies are not robust. We show that non-trivial robust policies exist and provide a recipe for constructing robust extensions of non-robust policies. An example illustrates our results.

Keywords: Social Security, robust policy

Suggested Citation

Gremm, Martin and Wise, Mark B., Mathematical Constraints on Financially Viable Public Policy (January 5, 2012). Available at SSRN: https://ssrn.com/abstract=2003978 or http://dx.doi.org/10.2139/ssrn.2003978

Martin Gremm

Pivot Point Advisors ( email )

Bellaire, TX 77401
United States

Mark B. Wise (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States
626-395-6687 (Phone)
626-568-8473 (Fax)

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