Social Security Literacy and Retirement Well-Being. Hugo Benítez-Silva (SUNY-Stony Brook) Berna Demiralp (Old Dominion University) Zhen Liu (SUNY-Buffalo) UM09-11. Introduction and Motivation.
Hugo Benítez-Silva (SUNY-Stony Brook)
Berna Demiralp (Old Dominion University)
Zhen Liu (SUNY-Buffalo)
What is the earliest age of retirement at which Social Security would pay you full, unreduced benefits?
What is the maximum age at which you can claim Social Security retirement benefits so that Social Security will adjust your benefits upward [because of the delay in claiming benefits]?
What is the minimum number of working years that qualify you to receive Social Security Retirement Benefits?
If you earned $10,000 in a given year from working after you began receiving Social Security Retirement Benefits at age 62, do you think your Social Security benefits would be reduced?
What about if you earned $20,000 in a given year from working after you began receiving Social Security Retirement Benefits at age 62, do you think your Social Security benefits would be reduced?
The benchmark model does an excellent job at replicating the actual data on the proportion of individuals who claim benefits at each age.
This model assumes individuals know and understand the complex incentive structure of the retirement system in the United States.
We have shown this is hardly a realistic assumption, but can we assess whether the pervasive lack of knowledge is costing us much in terms of welfare.
One of the great advantages of utility based life-cycle models is that we can use them to perform welfare calculations, in which we compare the well-being of agents under different regimes
We can, for example, use the model to compare the well-being under two different incentive structures, or as in this research under two different informational structures
We can compare the benchmark model with a variety of possible informational structures
We have re-solved and re-simulate the model assuming that individuals do not know the details of the retirement system, and behave mimicking the people around them.
This means, for example, what when an individual reaches age 62, he does not make any complicated calculation to decide whether she should claim benefits, but behaves like the average person, who claims 52% of the times at that age.
We know this behavior is suboptimal, but the key is to compute the welfare gain from information, and with that impute the cost that the individual is willing to bear to access that better level of information
We find that a large proportion of individuals would gain from full-information. This proportion varies by age. Around 95% of those who are 60 years old would sharply benefit from better information. But only 28% of those who are 40.
The welfare gain is computed in terms of willingness to pay out of the current level of wealth. Technically, we find that an average 60 year old who knows the rules of the system would have to be compensated with more than 50% of his current wealth in order to accept the suboptimal behavior we have explained.
The result hinges on the particular informational structure we have assumed, but many others can be studied like for example assuming the consequences of thinking that the ERA is 63 or 64.
Complete ignorance (e.g. “I believe the youngest age cannot be anything other than 65”)
Ignorance with awareness about ignorance (e.g. “I think it is 65, but I could be wrong.”)
Ignorance with a prior (e.g. “I guess it is 65 with 50% chance being correct”)
Accurate knowledge (e.g. “I am sure it is 62 and I have double checked”)
We find Americans have a limited knowledge of some of the basic rules of the Retirement System
We find that a large proportion of Americans would strongly benefit from access to good information compared with suboptimal “me too” strategies which do not take into account the individual’s particular circumstances
Informational structures can be key to assess the appropriateness and consequences of the policy changes analyzed in our models