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Social Security Reform in the Presence of Informality (2021) Review of Economic Dynamics, 40: 228-251. Appendix



Abstract: Why do individuals retire and claim their Social Security benefits at the age they do? Understanding the key drivers of these decisions has been an important topic of research as it can help guide policy discussions on the impact of potential reforms to the Social Security program. We revisit this crucial question by exploring new sources of heterogeneity in these decisions as well as novel mechanisms governing these trade-offs. Using data from the Health and Retirement Study and the Understanding America Survey, we first document (1) important heterogeneities in social security claiming behavior of men by their education and marital status, (2) strong correlations between health, labor supply and benefit claiming decisions and (3) significant misinformation related to Social Security program knowledge and survival chances at older ages. We then build a life-cycle model of consumption, savings, labor supply, and Social Security application decisions as well as heterogeneity in education, marital status and SS program knowledge. The model includes uncertainty in health, subjective survival, wages, and job separation as well as rich details of the U.S. Social Security program to understand why a majority of individuals claim Social Security benefits prior to their normal retirement age, despite large penalties associated with these early benefit claims. We show that the estimated model can closely match the claiming behavior as seen in the data and also produce differences in SS claims along the dimensions of heterogeneity considered. Counterfactual experiments indicate that precautionary motives, misinformation, and preferences governing future discounting as well as altruism, together, go a long way in explaining overall claiming behavior. Together, these forces can explain a third of the overall early benefit claims and two-thirds of age 62 claims– with varying intensities across education and marital groups.  


Abstract: The share of retirees and the size of benefits paid are critical to determine an economy’s aggregate spending on Social Security. Increasing the statutory retirement age is a popular policy proposal to decrease the burden of aging populations on pension systems by decreasing the share of households eligible pension benefits. However, in a system in which pension benefits are a function of lifetime earnings, changes in both the extensive and intensive margins of labor supply in response to a reform impact pension costs. Using a heterogeneous-agent OLG model with endogenous retirement choice and pension benefits, I study a 2019 Brazilian pension reform which increased the retirement age. I find that while the reform decreases aggregate pension costs by around 3 percent of GDP, it leads to welfare losses for high-income households. Moreover, I find that a policy which limits the link between intensive margin labor supply and pension size leads to higher aggregate pension costs than the 2019 reform. 



Occupational Heterogeneity and Retirement Behavior, with Neha Bairoliya
Heterogeneities in Subjective Mortality, with Neha Bairoliya