How Does Social Security Reform Indecision Affect Younger Cohorts?
The Social Security trust fund will be exhausted in the early 2030s. The U.S. government will need to make a choice about how to address the impending trust fund exhaustion, but it is unclear what it will choose to do. This indecision leaves young and middle-aged workers not knowing whether they will face Social Security benefit cuts, payroll tax increases, or an increase in the full retirement age. This uncertainty about what will happen in the future causes young and middle-aged cohorts who are saving for retirement to make mistakes that could be avoided if the government decided earlier what will happen when the trust fund runs dry. This paper examines the cost of government indecision on Social Security reform. We calculate the value that people in different income classes and different birth cohorts would receive if the government decided now what it will do when the trust funds are exhausted. We find that the cost of indecision can be large. In some cases, the value of knowing today what the policy change will be in 2035 is worth more than two months of labor market earnings.
This paper was prepared for the volume "Overtime: America's Aging Workforce and the Future of 'Working Longer'," edited by Lisa Berkman and Beth Truesdale. Overtime is supported by the Alfred P. Sloan Foundation's Working Longer project. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
I have received financial support summing to at least $10,000 in the past three years from the following organizations: 1) The Alfred P. Sloan Foundation through the National Bureau of Economic Research, Stanford University, and George Mason University; 2) The American Enterprise Institute.