Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving
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Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement
and Saving
Alan L. Gustman and
Thomas L. Steinmeier
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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
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Simple Consumption Model with Annuity
)Cu(δ1
1sU t
tD
0tt
With initial lump sum plus an annuity
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Hypothetical Consumption Path
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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
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Important Features of Data
Retirement Spike at Age 62Wide Distribution of Wealth, Even Given EarningsHigh Percentage Claiming Social Security Early
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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
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Perc
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Retirements of Husbands from Full-Time Work
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Observed
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Perc
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Retirements of Husbands from All Work
Simulated
Observed
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0102030405060708090
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62 63 64 65 66 67 68
Perc
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Percent of Husbands ClaimingSocial Security Benefits
Simulated
Observed
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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.
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The End