Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement

and Saving

Alan L. Gustman and

Thomas L. Steinmeier

Actuarial Rates for Claiming at Various AgesAt a 2% Real Interest Rate

Married Single

Claiming Age 62 1.67 1.18 63 1.50 1.05 64 1.36 0.95 65 1.48 1.02 66 1.33 0.91 67 1.20 0.82 68 1.09 0.74 69 0.99 0.66

Simple Consumption Model with Annuity

)Cu(δ1

1sU t

tD

0tt

With initial lump sum plus an annuity

0

5000

10000

15000

20000

25000

30000

35000

65 70 75 80 85 90 95 100

Hypothetical Consumption Path

Annuities: Willingness to Pay vs. Actuarial Value At Age 62 with a 2% Real Interest Rate

Age When Non-annuity Income Becomes ZeroDiscount ------------------------------------------------------------------------ Rate 62 70 80 90 100

0.00 1.23 1.25 1.38 1.60 1.78 0.02 1.00 1.14 1.34 1.59 1.78 0.04 0.83 1.05 1.32 1.58 1.78 0.06 0.71 0.98 1.29 1.57 1.78

Important Features of Data

Retirement Spike at Age 62Wide Distribution of Wealth, Even Given EarningsHigh Percentage Claiming Social Security Early

Elements of Econometric Model

Utility FunctionLifetime Utility Function with Consumption and LeisureHeterogeneous Discount Rates and Leisure Preferences

Leisure and Work Effort3 Levels of Work Effort (Full-Time, Partial Retirement, Full Retirement)May Return to Work After Retirement

Budget ConstraintEndogenous Assets with Stochastic Interest RatesDefined Benefit and Defined Contribution PensionsSocial Security Benefits, Including Spouse and Survivor Benefits Includes Earnings Test, Early and Delayed Retirement AdjustmentsEndogenous Choice of Age to Claim Social Security Benefits

Estimated by MSM with a Sample of Original HRS Married Households No Claiming Behavior Used in the Estimation

0

2

4

6

8

10

12

14

16

18

58 59 60 61 62 63 64 65 66 67

Perc

ent

Age

Retirements of Husbands from Full-Time Work

Simulated

Observed

0

2

4

6

8

10

12

14

16

18

58 59 60 61 62 63 64 65 66 67

Perc

ent

Age

Retirements of Husbands from All Work

Simulated

Observed

0102030405060708090

100

62 63 64 65 66 67 68

Perc

ent

Age

Percent of Husbands ClaimingSocial Security Benefits

Simulated

Observed

Conclusions

Changes in expected rate of return perhaps the most plausible explanation for underestimates of claiming, but other explanations not excluded.

Increase in early entitlement age has by far the largest employment effect.Increase in normal retirement age probably has greatest effect on solvency.

Policies have different effects on different segments of a heterogeneous population. Increase in early entitlement age probably impacts individuals with relatively high discount rates more. Increase in magnitude and variability of medical expenditures later in life probably affects the decisions of those with low discount rates more.

The End