Wednesday, August 24, 2016

The spectral theory of Social Security stability

The CBO puts out the central tendency of social security trust funds, telling us where the funding stands assuming all other things equal.  We all know it is only a short term projection, it is a line, after all, and the line goes squiggly in the past.

The assumption 'all thing being equal' is the Magic Walrus assumption. It means that all components of the economy have enough liquidity to survive shocks to  the constrained flow.  That liquidity is called spectra in stochastic yheory.

What spectra rules in social security?  The update rate, how often do the overlapping generations meet to make small changes in the in and outs?  In our case, we have an expansion in the 60s, and a correction in the eighties, about 20 years apart.  Nyquist theory tells us that information about the central tendency is best known for yhe 40 year period, one half the sample rate.

Do we collective agents act like Nyquist is true?  Well, yes in many instances.  And the more we act like its true, the more accurate are the CBO projections.

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