Further reflections on actuarial recognition of nuclear holocaust hazard

Abstract

In a paper presented to the Twenty-Second Actuarial Research Conference, held in 1987 at the University of Toronto, a notation and mathematical model were developed to explore the impact of nuclear holocaust hazard on actuarial mathematics. The purpose of the present paper is to consider this hazard in relation to long-term income maintenance systems such as Social Security and retirement plans.The paper begins with a brief recollection of the notations used in the Toronto paper. It then highlights the actuarial projections of the 1988 Annual Report of the Board of Trustees of U.S. Old-Age and Survivors Insurance and Disability Insurance Trust Funds. This is a very large system with current annual outgo $220 billion, and rapidly growing assets. Under the less optimistic of two intermediate projections, the combined trust funds are estimated to reach a level of $12 trillion by the end of 2030. Thereafter, the funds are projected to decline rapidly to exhaustion by 2050. A simple difference equation, in the notation of the Toronto paper, is examined as a possible means of controlling the upward and downward changes in the trust funds if Congress periodically adjusts OASDI financing to satisfy the equation.Next sections of the paper consider what recognition of nuclear holocaust hazard would mean for pension mathematics. The easiest situation to discuss is in regard to reserves for retired members and beneficiaries. A second matter is the calculation of optional retirement annuities, and could entail much numerical work. The funding for active members will bring up many questions, in particular, in regard to the actuarial assumptions.In concluding sections, the paper attempts to measure the scientific worth of recognizing nuclear holocaust hazard in our actuarial mathematics, and the consequences thereof. One keeps coming back to the idea that the only practical way to recognize such hazard is by a specific component of the interest rate. Thereby, long-term financial transactions can proceed quite logically even in the presence of the hazard. But one essential step for world progress is to minimize nuclear holocaust hazard. To aid this process, actuarial science should seek its truths, and communicate them widely.