Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving
Social Security continues to be under substantial financial pressure (Social Security Administration Trustees Report, 2012). A number of policy changes have been suggested to enhance solvency, bring liabilities more in line with revenue, and in the process, encourage a population that is becoming increasingly long lived to delay retirement.
In this paper we examine the likely effects of three such policy changes, increasing Social Security’s early entitlement age, raising the full (normal) retirement age, and eliminating the payroll tax for those over the full retirement age. We also consider the sensitivity of findings as to the effects of these policies to the features of the econometric model used to analyze their impact.
To understand the effects of these policy changes, one must have a model that is capable of jointly explaining retirement, saving and claiming behavior, and the distribution of these outcomes throughout the population. Accordingly, we specify and estimate an enhanced version of a dynamic, stochastic, structural model, where each of these outcomes is endogenously determined. Our estimates, based on a sample of married households from the Health and Retirement Study, generate the key behavioral parameters required to simulate the full effects of the proposed policy changes.
Policy analysts have had trouble in explaining claiming behavior. In particular, most models, including an earlier version of our model, do not explain why, given other aspects of their behavior, people claim their Social Security benefits as early as they do. The benefit adjustments offered by the Social Security system to those who delay claiming are sufficient for most analyses to suggest that claiming should be occurring at older ages than is found in the data.