social security literacy and retirement well-being
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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. - PowerPoint PPT PresentationTRANSCRIPT
Social Security Literacy Social Security Literacy and Retirement Well-Beingand Retirement Well-Being
Hugo Benítez-Silva (SUNY-Stony Brook)Berna Demiralp (Old Dominion University)Zhen Liu (SUNY-Buffalo)
UM09-11
Introduction and MotivationIntroduction and Motivation Financial Literacy has become an even
more important issue with the events of the last year and a half
Social Security Literacy is still a relatively unexplored topic, while a high level of knowledge by individuals is an underlying assumption of most retirement models
Anecdotal evidence indicates the level of knowledge is not very high
ContributionContribution We provide evidence of the level of basic
knowledge about the Social Security Retirement System using two waves of a Survey funded by Stony Brook and MRRC
The second part of this project, assesses the effect on Well-Being of the lack of knowledge about the system using a Dynamic Life-Cycle Model of Retirement
We are also able to impute the cost of acquiring knowledge
SB 2007-2008 Social Security StudySB 2007-2008 Social Security Study Two telephone surveys conducted at Stony
Brook’s Center for Survey Research during August 2007 (funded with a Seed Grant from the V.P. for Research at SB), and December 2008 (funded by MRRC)
Samples of 500 and 507 observations, nationally representative. 179 observations of the 2008 survey were re-interviews
Response Frequency PercentCummulative
percent
Less than 50 52 8.37 8.3751 to 61 108 17.39 25.76Exactly 62 298 47.99 73.7563 to 64 15 2.42 76.17Exactly 65 83 13.37 89.53Over 66 37 5.96 95.49Don't know 28 4.51 100Total 621 100
What is the youngest age at which an eligible worker can apply for his or her own Social Security retirement benefits? (All respondents 2007 and 2008)
What is the youngest age at which an eligible worker can apply for his or her own Social Security retirement benefits?
Response
Sample
Total2007 respondents
2008 new respondents
2008 re-interviewed respondents
Less than 50 9.57% 7.5% 6.19% 8.37%51 to 61 19.14% 15.5% 15.46% 17.39%Exactly 62 41.98% 54% 55.67% 47.99%63 to 64 2.47% 3% 1.03% 2.42%Exactly 65 15.43% 10% 13.4% 13.37%Over 66 5.56% 6% 7.22% 5.96%Don’t know 5.86% 4% 1.03% 4.51%# Obs. 324 200 97 621
What is the earliest age of retirement at which Social Security would pay you full, unreduced benefits?
19.44
65.74
8.33 6.48
19
69
9
3
10.31
69.07
18.56
2.06
0
10
20
30
40
50
60
70
80
Below 65 65 to 67 Over 67 Don't know
Responses
% o
f res
po
nd
ents
2007 respondents 2008 new respondents 2008 re-interviewed respondents
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]?
10.49
14.2
22.8421.6
30.86
7
20.5
23.5
16.5
32.5
6.19
12.37
45.36
21.65
14.43
0
5
10
15
20
25
30
35
40
45
50
Below 65 65 to 69 Exactly 70 Over 70 Don't know
Responses
% o
f re
sp
on
de
nts
2007 respondents 2008 new respondents 2008 re-interviewed respondents
What is the minimum number of working years that qualify you to receive Social Security Retirement Benefits?
17.28
23.15
14.51
19.44
25.62
19
21.5
12.5 12.5
34.5
29.9
32.99
14.43
11.34 11.34
0
5
10
15
20
25
30
35
40
Less than 10 Exactly 10 11 to 20 More than 20 Don't know
Responses
% o
f re
sp
on
de
nts
2007 respondents 2008 new respondents 2008 re-interviewed respondents
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?
52.16
39.2
8.64
50.5
45
4.5
48.4550.52
1.03
0
10
20
30
40
50
60
Yes No Don't know
Responses
% o
f re
sp
on
de
nts
2007 respondents 2008 new respondents 2008 re-interviewed respondents
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?
70.99
19.75
9.26
66
26
8
77.32
18.56
4.12
0
10
20
30
40
50
60
70
80
90
Yes No Don't know
Responses
% o
f re
sp
on
de
nts
2007 respondents 2008 new respondents 2008 re-interviewed respondents
0.170.20
0.32
0.45 0.43
0.53
0.65
0.72
0.46
1.00
0.2
.4.6
.81
Fra
ctio
n of
cor
rect
re
spon
ses
18-34 35-44 45-54 55-64 65 or more
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by age categoriesKnowledge of the Early Retirement Age
2007 2008
0.19
0.36 0.36
0.480.44
0.490.47
0.62
0.2
.4.6
Fra
ctio
n of
cor
rect
re
spon
ses
Less than HS HS graduates Some college Bachelor's and above
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by educational levelsKnowledge of the Early Retirement Age
2007 2008
0.170.20 0.20
0.36
0.18
0.23
0.33
0.400.38
0.60
0.2
.4.6
Fra
ctio
n of
cor
rect
re
spon
ses
18-34 35-44 45-54 55-64 65 or more
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by age categoriesKnowledge of Maximum Retirement Age
2007 2008
0.05
0.14 0.15
0.39
0.18
0.300.32 0.31
0.1
.2.3
.4F
ract
ion
of c
orre
ct r
esp
onse
s
Less than HS HS graduates Some college Bachelor's and above
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by educational levelsKnowledge of Maximum Retirement Age
2007 2008
0.19
0.53
0.43
0.49
0.42
0.54
0.49
0.62
0.55
0.45
0.2
.4.6
Fra
ctio
n o
f co
rre
ct r
esp
on
ses
Less than $35K$35K to $60K
$60K to $100KOver $100K
Refused
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by income levelsKnowledge of the Early Retirement Age
2007 2008
0.17
0.26 0.27
0.31
0.25
0.29
0.24
0.37
0.180.21
0.1
.2.3
.4F
ract
ion o
f co
rre
ct r
esp
on
ses
Less than $35K$35K to $60K
$60K to $100KOver $100K
Refused
Source: SB 2007/2008 Social Security Study (all respondents from each year)
by income levelsKnowledge of Maximum Retirement Age
2007 2008
The Dynamic Model (I) We solve and simulate a Dynamic Life Cycle
Model of Retirement Behavior under uncertainty
Individuals face life uncertainty, income uncertainty, health uncertainty, and employment uncertainty, and optimally choose how much to consume, save, work, and when to claim retirement benefits
We model in detail the U.S. retirement system and add unemployment insurance
The Dynamic Model (II) 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.
Actual vs. Simulated Retirement Claiming
Age Actual (in %. 2006) Simulated (%)
62 53.8 52.93
63 8.56 15.84
64 10.4 11.16
65 22.3 17.82
66+ 2.7 2.22
The Dynamic Model (III) 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
The Dynamic Model (IV) 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
Results of the Model 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.
A ranking of informational structures we are considering
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”)
How might incentives work with various informational structures
Copying the majority around As in the current model
Optimizing with given information Using given knowledge as constraints
Searching for extra information Needs further assumptions on search costs
Hiring professionals Needs further assumptions on agency costs
Conclusions 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