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Do better–informed workers make better retirement choices? A test based on the Social Security Statement

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  • Giovanni Mastrobuoni

Abstract

In 1995, the Social Security Administration started sending out the annual Social Security Statement. It contains information about the worker’s estimated benefits at the ages 62, 65, and 70. We use this unique natural experiment to analyze the retirement and claiming decision making. First, we find that, despite the previ- ous availability of information, the Statement has a significant impact on workers’ knowledge about their benefits. These findings are consistent with a model where workers need to gather costly information in order to improve their retirement deci- sion. Second, we use this exogenous variation in knowledge to analyze the optimality of workers’ decisions. We do not find an overall improvement in workers’ retirement behavior, but there are some changes among particular groups. Workers aged 62 and 65 become less sensitive to Social Security Incentives. Age 62 and 65 are the two ages at which the retirement benefits are reported in the Statement, which suggests that some workers may use them as focal points. Additionally, we find evidence that before the Statement was introduced uninformed workers, who are more likely to be low–educated and black, made, on average, worse retirement decisions, and that workers with a dependent spouse usually disregarded their own spouse’s benefits in their calculations. The information contained in the Statement appears to have helped both groups, though with the important exception of black workers.

Suggested Citation

  • Giovanni Mastrobuoni, 2007. "Do better–informed workers make better retirement choices? A test based on the Social Security Statement," Carlo Alberto Notebooks 51, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:51
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    File URL: http://www.carloalberto.org/assets/working-papers/no.51.pdf
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    References listed on IDEAS

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    1. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
    2. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    3. McCall, Brian P, 1994. "Testing the Proportional Hazards Assumption in the Presence of Unmeasured Heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(3), pages 321-334, July-Sept.
    4. Coile, Courtney & Diamond, Peter & Gruber, Jonathan & Jousten, Alain, 2002. "Delays in claiming social security benefits," Journal of Public Economics, Elsevier, vol. 84(3), pages 357-385, June.
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    Citations

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    Cited by:

    1. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," American Economic Review, American Economic Association, pages 413-417.
    2. Margaret Miller & Julia Reichelstein & Christian Salas & Bilal Zia, 2015. "Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature," World Bank Research Observer, World Bank Group, vol. 30(2), pages 220-246.
    3. Hugo Benítez-Silva & Frank Heiland, 2007. "The social security earnings test and work incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 26(3), pages 527-555.
    4. Annamaria Lusardi, 2010. "Financial Capability in the United States: Consumer Decision-Making and the Role of Social Security," Working Papers wp226, University of Michigan, Michigan Retirement Research Center.
    5. Mastrobuoni, Giovanni, 2009. "Labor supply effects of the recent social security benefit cuts: Empirical estimates using cohort discontinuities," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1224-1233, December.
    6. Eduardo Fajnzylber & Gonzalo Plaza & Gonzalo Reyes, 2009. "Better-informed Workers and Retirement Savings Decisions: Impact Evaluation of a Personalized Pension Projection," Working Papers 31, Superintendencia de Pensiones, revised Sep 2009.
    7. Landerretche, Oscar M. & Martínez, Claudia, 2013. "Voluntary savings, financial behavior, and pension finance literacy: evidence from Chile," Journal of Pension Economics and Finance, Cambridge University Press, pages 251-297.
    8. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    9. Eduardo Fajnzylber & Gonzalo Reyes, 2015. "Knowledge, Information, and Retirement Saving Decisions: Evidence from a Large-Scale Intervention in Chile," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 83-117, February.
    10. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    11. Lusardi, Annamaria, 2007. "Household saving behavior: The role of literacy, information and financial education programs," CFS Working Paper Series 2007/28, Center for Financial Studies (CFS).
    12. Annamaria Lusardi & Olivia Mitchell, 2006. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs," Working Papers wp144, University of Michigan, Michigan Retirement Research Center.
    13. Hugo Benitez-Silva & Frank Heiland, 2008. "Early Retirement, Labor Supply, and Benefit Withholding: The Role of the Social Security Earnings Test," Working Papers wp183, University of Michigan, Michigan Retirement Research Center.
    14. Hugo Benitez-Silva & Debra S. Dwyer & Frank Heiland & Warren C. Sanderson, 2006. "Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle," Department of Economics Working Papers 06-05, Stony Brook University, Department of Economics.
    15. Hugo Benitez-Silva & Frank Heiland, 2006. "The Social Security Earnings Test Revisited: Information, Distortions, and Costs," Department of Economics Working Papers 06-04, Stony Brook University, Department of Economics.

    More about this item

    Keywords

    social security statements; retirement expectations; retirement behavior; social security incentives;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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