New Social Security papers from the National Bureau of Economic Research

A Matter of Trust: Understanding Worldwide Public Pension Conversions by Kent Smetters, Walter E. Theseira - #17015 (AG PE POL)

Abstract: This paper seeks to explain the key two stylized facts of fundamental reforms to social security systems worldwide: Why have so many countries reformed when traditional systems seem, at first glance, to have a higher probability of delivering a secure retirement income? Why have these reforms been larger in developing countries facing less severe demographic problems? We show that an OLG voter model can answer both questions.    Larger reforms are motivated by a fundamental breakdown in intergenerational trust while smaller reforms are caused by a lack of trust in the ability of the government to save. Empirical analysis seems to support the model. http://papers.nber.org/papers/W17015

Framing Effects and Expected Social Security Claiming Behavior by Jeffrey R. Brown, Arie Kapteyn, Olivia S. Mitchell - #17018 (AG PE)

Abstract: Eligible participants in the U.S. Social Security system may claim benefits anytime from age 62-70, with benefit levels actuarially adjusted based on the claiming age. This paper shows that individual intentions with regard to Social Security claiming ages are sensitive to how the early versus late claiming decision is framed. Using an experimental design, we find that the use of a "break-even analysis" has the very strong effect of encouraging individuals to claim early. We also show that individuals are more likely to report they will delay claiming when later claiming is framed as a gain, and when the information provides an anchoring point at older, rather than younger, ages. Moreover, females, individuals with credit card debt, and workers with lower expected benefits are more strongly influenced by framing. We conclude that some individuals may not make fully rational optimizing choices when it comes to choosing a claiming date. http://papers.nber.org/papers/W17018

Optimal Portfolio Choice with Wage-Indexed Social Security by Jialun Li, Kent Smetters - #17025 (AG AP PE)

Abstract: This paper re-examines the classic question of how a household should optimally allocate its portfolio between risky stocks and risk-free bonds over its lifecycle. We show that allowing for the wage indexation of social security benefits fundamentally alters the optimal decisions. Moreover, the optimal allocation is close to observed empirical behavior. Households, therefore, do not appear to be making large "mistakes," as sometimes believed. In fact, traditional financial planning advice, as embedded in "target date" funds - whose enormous recent growth has been encouraged by new government policy - often leads to even relatively larger "mistakes" and welfare losses. http://papers.nber.org/papers/W17025