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Dying to Retire: Adverse Selection and Welfare in Social Security

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  • Andrew Beauchamp

    ()
    (Boston College)

  • Mathis Wagner

    ()
    (Boston College)

Abstract

Despite facing some of the same challenges as private insurance markets, little is known about the role of adverse selection in social insurance programs. This paper studies adverse selection in Social Security retirement choices using data from the Health and Retirement Study. We find robust evidence that people who live longer choose larger annuities by delaying the age they first claim benefits, a form of adverse selection. To quantify welfare consequences we develop and estimate a simple model of annuity choice. We exploit variation in longevity, the underlying source of private information, to identify the key structural parameters: the coefficient of relative risk aversion and the discount rate. We estimate that adverse selection reduces social welfare by 2.3-3.5 percent, and increases the costs to the Social Security Trust Fund by 2.1-2.5 percent, relative to the first best allocation. Counterfactual simulations suggest program adjustments could generate both economically significant decreases in costs and small increases in social welfare. We estimate an optimal non-linear accrual rate which would result in welfare gains of 1.4 percent, and cost reductions of 6.1 percent of current program costs.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 818.

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Date of creation: 31 Dec 2012
Date of revision: 15 Aug 2013
Handle: RePEc:boc:bocoec:818

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Keywords: Adverse Selection; Social Security; Optimal Policy;

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References

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  1. Courtney Coile & Peter Diamond & Jonathan Gruber & Alain Jousten, 1999. "Delays in Claiming Social Security Benefits," NBER Working Papers 7318, National Bureau of Economic Research, Inc.
  2. Michael Insler, 2013. "The Health Consequences of Retirement," Departmental Working Papers 43, United States Naval Academy Department of Economics.
  3. David Autor & Mark Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," NBER Working Papers 12436, National Bureau of Economic Research, Inc.
  4. Michael D. Hurd & James P. Smith & Julie M. Zissimopoulos, 2004. "The effects of subjective survival on retirement and Social Security claiming," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 761-775.
  5. Martin B. Hackmann & Jonathan T. Kolstad & Amanda E. Kowalski, 2012. "Health Reform, Health Insurance, and Selection: Estimating Selection into Health Insurance Using the Massachusetts Health Reform," NBER Working Papers 17748, National Bureau of Economic Research, Inc.
  6. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2010. "Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence From the U.K. Annuity Market," Econometrica, Econometric Society, vol. 78(3), pages 1031-1092, 05.
  7. Martin Feldstein, 2005. "Structural Reform of Social Security," NBER Working Papers 11098, National Bureau of Economic Research, Inc.
  8. John B. Shoven & Sita Nataraj Slavov, 2012. "When Does It Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules," NBER Working Papers 18210, National Bureau of Economic Research, Inc.
  9. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
  10. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc.
  11. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  12. Pierre‐André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2006. "Asymmetric information in insurance: general testable implications," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 783-798, December.
  13. repec:rje:randje:v:37:y:2006:i:4:p:783-798 is not listed on IDEAS
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Cited by:
  1. Martin B. Hackmann & Jonathan T. Kolstad & Amanda E. Kowalski, 2013. "Adverse Selection and an Individual Mandate: When Theory Meets Practice," Cowles Foundation Discussion Papers 1899, Cowles Foundation for Research in Economics, Yale University.
  2. John Shoven & Sita Slavov, 2013. "Recent Changes In The Gains From Delaying Social Security," Discussion Papers 13-019, Stanford Institute for Economic Policy Research.

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