The Costs and Consequences of Perceived Political Uncertainty in Social Security

Erzo F. P. Luttmer, Andrew A. Samwick

NBER Retirement Research Center Paper No. NB 11-11
Issued in September 2011

Households approaching retirement face political uncertainty in their retirement opportunities due to the long-term actuarial deficit in the Social Security program. We field an original internet survey to analyze the impact of this uncertainty on household welfare and behavior. On average, our survey respondents expect only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average households would be willing to forego 4 – 6 percent of the benefits they are supposed to get under current law to remove the political uncertainty associated with their future benefits. However, responses to hypothetical questions about behavior in the absence of political uncertainty do not suggest that respondents are engaged in precautionary behavior due to the uncertainty.

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