Mathematical Constraints on Financially Viable Public Policy

Details Mathematical Constraints on Financially Viable Public Policy Mathematical Constraints on Financially Viable Public Policy

2012-01-30

arxiv.org/abs/1201.6340v1

Economy

Quantitative Finance

General Finance

11 pages

Scientific paper

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.

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