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The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security

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  • Erzo F. P. Luttmer
  • Andrew A. Samwick

Abstract

Policy uncertainty reduces individual welfare when individuals have limited opportunities to mitigate or insure against the resulting consumption fluctuations. We field an original survey to measure the degree of perceived policy uncertainty in Social Security benefits and to estimate the impact of this uncertainty on individual welfare. Our central estimates show that on average individuals are willing to forgo 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future Social Security benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.

Suggested Citation

  • Erzo F. P. Luttmer & Andrew A. Samwick, 2018. "The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security," American Economic Review, American Economic Association, vol. 108(2), pages 275-307, February.
    • Handle: RePEc:aea:aecrev:v:108:y:2018:i:2:p:275-307
    Note: DOI: 10.1257/aer.20151703
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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