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Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving

Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving. Alan L. Gustman and Thomas L. Steinmeier. Actuarial Rates for Claiming at Various Ages At a 2% Real Interest Rate Married Single Claiming Age

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Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving

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  1. Behavioral Effects of Social Security Policies on Benefit Claiming, Retirement and Saving Alan L. Gustman and Thomas L. Steinmeier

  2. Actuarial Rates for Claiming at Various Ages At a 2% Real Interest Rate Married Single Claiming Age 62 1.67 1.18 63 1.50 1.05 64 1.36 0.95 65 1.48 1.02 66 1.33 0.91 67 1.20 0.82 68 1.09 0.74 69 0.99 0.66

  3. Simple Consumption Model with Annuity With initial lump sum plus an annuity

  4. Annuities: Willingness to Pay vs. Actuarial Value At Age 62 with a 2% Real Interest Rate Age When Non-annuity Income Becomes Zero Discount ------------------------------------------------------------------------ Rate 62 70 80 90 100 0.00 1.23 1.25 1.38 1.60 1.78   0.02 1.00 1.14 1.34 1.59 1.78 0.04 0.83 1.05 1.32 1.58 1.78 0.06 0.71 0.98 1.29 1.57 1.78

  5. Important Features of Data Retirement Spike at Age 62 Wide Distribution of Wealth, Even Given Earnings High Percentage Claiming Social Security Early

  6. Elements of Econometric Model Utility Function Lifetime Utility Function with Consumption and Leisure Heterogeneous Discount Rates and Leisure Preferences Leisure and Work Effort 3 Levels of Work Effort (Full-Time, Partial Retirement, Full Retirement) May Return to Work After Retirement Budget Constraint Endogenous Assets with Stochastic Interest Rates Defined Benefit and Defined Contribution Pensions Social Security Benefits, Including Spouse and Survivor Benefits Includes Earnings Test, Early and Delayed Retirement Adjustments Endogenous Choice of Age to Claim Social Security Benefits Estimated by MSM with a Sample of Original HRS Married Households No Claiming Behavior Used in the Estimation

  7. Conclusions Changes in expected rate of return perhaps the most plausible explanation for underestimates of claiming, but other explanations not excluded. Increase in early entitlement age has by far the largest employment effect. Increase in normal retirement age probably has greatest effect on solvency. Policies have different effects on different segments of a heterogeneous population. Increase in early entitlement age probably impacts individuals with relatively high discount rates more. Increase in magnitude and variability of medical expenditures later in life probably affects the decisions of those with low discount rates more.

  8. The End

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