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The potential impact of policies to reduce Social Security funding shortfalls on consumers' expected benefits and behavior

Published online by Cambridge University Press:  13 November 2019

Francisco Perez-Arce*
Affiliation:
Center for Economic and Social Research, University of Southern California, Washington, District of Columbia, USA
Lila Rabinovich
Affiliation:
Center for Economic and Social Research, University of Southern California, Washington, District of Columbia, USA
Joanne Yoong
Affiliation:
Center for Economic and Social Research, University of Southern California, Washington, District of Columbia, USA Yong Loo Lin School of Medicine, National University of Singapore, Singapore
*
*Corresponding author. Email: perezarc@usc.edu

Abstract

To ensure the long-term sustainability of the US Social Security System, several policy alternatives can theoretically be implemented. However, in practice, consumer responses can be challenging for policymakers to anticipate. We conducted a randomized survey on the nationally-representative Understanding America Study (UAS) panel where respondents were presented with a series of ‘policy scenarios’ in which the government enacts alternative reforms aimed to reduce the expected shortfall in the trust fund that pays Social Security retirement benefits. These scenarios included an increase in the Social Security payroll tax, an increase in the wage ceiling, and a reduction of benefits. We find that changes in respondents’ subjective expectations about their benefits and how this will affect their behaviors are directionally consistent with what would be expected when individuals are attentive to the available information and form rational expectations (e.g., monthly benefit expectations increase upon the announcement of an increase in the Social Security tax rate or in the wage ceiling, and they decrease less-than-proportionally with hypothetical benefit cuts). However, surprisingly, these changes are not sensitive to the magnitudes of policy change (e.g., the increase in expected benefits is about the same regardless of the size of Social Security payroll tax increases). Individuals with higher levels of education, cognitive ability, and financial literacy are more likely to adjust their expectations as predicted by theory.

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Article
Copyright
Copyright © Cambridge University Press 2019

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References

Delavande, A and Rohwedder, S (2008) Eliciting subjective probabilities in internet surveys. Public Opinion Quarterly 72, 866891.CrossRefGoogle ScholarPubMed
Delavande, A and Rohwedder, S (2017) Changes in spending and labor supply in response to a Social Security benefit cut: evidence from stated choice data. Journal of the Economics of Ageing 10, 3450.CrossRefGoogle ScholarPubMed
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Social Security Administration (2017) The 2017 OASDI Trustees Report. V. Available at https://www.ssa.gov/OACT/TR/2017/ (Accessed 15 February 2018).Google Scholar
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