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Dying to Retire: Adverse Selection and Welfare in Social Security

  • Andrew Beauchamp

    ()

    (Boston College)

  • Mathis Wagner

    ()

    (Boston College)

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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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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  1. 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," Cowles Foundation Discussion Papers 1841, Cowles Foundation for Research in Economics, Yale University.
  2. Michael Hurd & James P. Smith & Julie M. Zissimopoulos, 2003. "The Effects of Subjective Survival on Retirements and Social Security Claiming," Working Papers 03-11, RAND Corporation Publications Department.
  3. David H. Autor & Mark G. Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 71-96, Summer.
  4. repec:rje:randje:v:37:y:2006:i:4:p:783-798 is not listed on IDEAS
  5. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," Discussion Papers 04-031, Stanford Institute for Economic Policy Research.
  6. Michael Insler, 2014. "The Health Consequences of Retirement," Journal of Human Resources, University of Wisconsin Press, vol. 49(1), pages 195-233.
  7. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
  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. Pierre-André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2002. "Asymmetric Information in Insurance : General Testable Implications," Working Papers 2002-42, Centre de Recherche en Economie et Statistique.
  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. 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.
  13. 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.
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