WORKING PAPERS

Abstract: The Social Security (SS) program structure presents a trade-off between the number of years the benefits are received and the size of those benefits. SS claiming behavior, especially of those Americans with high life expectancy, suggests that older workers place little value on the longer-term annuity of these benefits, preferring instead to start receiving benefits as early as they can, even though this option reduces the overall payout. We explain this puzzling phenomenon within the scope of an augmented, albeit standard, forward-looking life-cycle framework. This contrasts with prior literature that relies on behavioral channels for an explanation. Toward this goal, we document how policy rules and claiming frictions — budgetary shocks, misbeliefs, and bequest motives — may impact claiming behavior. We build a structural life-cycle model of consumption, savings, retirement and Social Security claiming, with rich heterogeneity in demographics and family structure, to quantify the role and potential impact of these mechanisms. Counterfactual experiments show that the marital benefits and claiming frictions can explain 53 percent of overall early claims. Policy experiments highlight the role of these mechanisms in limiting the ability of households to augment their claiming ages in response to an increase in the normal retirement age. This is found to be especially true for singles who lack insurance through their spouses. Aggregate lifetime benefit payouts after such a policy change are found to be up to 24 percent higher if the impact of these mechanisms is not taken into account.  

Abstract: Social Security (SS) benefits, with an average replacement rate of around 40 percent, serve as an important source of retirement income for older Americans. Yet, the size of lifetime benefits a household receives depend on a myriad of factors, including the age of benefit claim and labor supply decisions. Given the complexity of the associated rules, many households may lack understanding of one or more aspects of the system. In this work, we use a life-cycle model of consumption, savings, labor supply, and Social Security application decisions to study the welfare impact of such misinformation. Our findings indicate significant welfare losses stemming from misinformation, especially when it causes individuals to strongly over-estimate the value of future entitlements. Additionally, we show that the Social Security Statement program, a large public information campaign, must inform only 5.5 percent of misinformed individuals in order for aggregate benefits of information to outweigh aggregate costs.  

Abstract: Uncertainty about one’s lifespan induces a preference for end-of-life liquidity (Yaari, 1965). Such preference, which can be characterized as a warm-glow motive but need not be interpreted that way, interacts with institutional constraints to shape life-cycle behaviors. We illustrate its quantitative importance using a model of consumption, labor supply, and retirement decisions and document a little-known set of distortions that the U.S. social security imposes on life-cycle decisions through the illiquid and uncertain nature of its entitlements. A minor policy change that reduces the value of retirement annuities in exchange for a guaranteed amount upon death induces large effects on life-cycle allocations and raises welfare, especially among unmarried individuals with low education.