What is a stochastic model?
A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques. Distributions of potential outcomes are derived from a large number of simulations (stochastic projections) which reflect the random variation in the input(s).
SSA's stochastic model
In August of 2002, the Social Security Administration's Office of the Chief Actuary began development of a stochastic model to to project a probability distribution for future outcomes of the financial status of the Social Security Trust Funds. The first version of this model (Version 2002.1) was completed in February 2003. It was based on the intermediate assumptions and the methods of the 2002 Trustees Report. Appendix E of the most recent Trustees Report presents an overview of the most recent methodology and results of our stochastic model. In addition, Actuarial Study #117 provides a more extensive description based on the 2004 version of the model and its results.