Abstract

http://ssrn.com/abstract=1090275
 
 

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Retirement Effects of Proposals by the President's Commission to Strengthen Social Security


Alan L. Gustman


Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Thomas L. Steinmeier


Texas Tech University - Department of Economics and Geography

March 2003

Michigan Retirement Research Center Research Paper No. WP 2003-038

Abstract:     
This paper simulates the retirement effects of the various elements of proposals made by the President's Commission to Strengthen Social Security (CSSS). Simulations are based on a structural dynamic model of retirement and savings estimated with data from the first five waves of the Health and Retirement Study. This model posits lifetime expected utility is constrained by an asset accumulation equation and an uncertain lifetime. Retirement preferences and time preferences are both allowed to be heterogeneous among workers, allowing the model to capture the peaks in retirement at both ages 62 and 65. Simulating over the next 75 years, the model suggests that the trend to earlier retirement, which has only recently been interrupted, should continue. The effect of Commission proposals is to provide individuals with incentives to delay their retirement substantially. The overall effect of these proposals could be enough to offset, or more than offset the trend to earlier retirement.

The largest effects on retirement in the Commission proposals comes from a provision in Model 2 which would keep benefits roughly constant in real terms. Compared to current law, which allows benefits to grow with wages, in 2075 years this provision would increase the fraction of those 62 years old at full-time work from 39 percent to 46 percent of the cohort. Indexing benefits to life expectancy, as in Plan 3, would lower the effect to 4 percentage points, about the same effect as allowing the system to continue, and after the trust fund is exhausted, paying benefits proportional to revenue. By 2075 a proposal in the Commission's Model 3 to reduce benefits of early retirees, but raise the actuarial adjustment for those who postpone retirement past the normal retirement age, would create a 3.4 percentage point increase in full-time work for those 65 years old, increasing the number of 65 year olds working full-time by fifteen percent. Other elements of the proposals, including increasing benefits for low wage workers and reducing benefits for high wage workers, would produce only very modest changes in retirement behavior, even within affected groups.

Note: The NBER version of this paper can be downloaded with charge at: http://ssrn.com/abstract=457552

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Date posted: February 11, 2008  

Suggested Citation

Gustman, Alan L. and Steinmeier, Thomas L., Retirement Effects of Proposals by the President's Commission to Strengthen Social Security (March 2003). Michigan Retirement Research Center Research Paper No. WP 2003-038. Available at SSRN: http://ssrn.com/abstract=1090275 or http://dx.doi.org/10.2139/ssrn.1090275

Contact Information

Alan L. Gustman (Contact Author)
Dartmouth College - Department of Economics ( email )
6106 Rockefeller Center
Hanover, NH 03755
United States
603-646-2641 (Phone)
603-646-2122 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Thomas L. Steinmeier
Texas Tech University - Department of Economics and Geography ( email )
Lubbock, TX 79409-2101
United States
806-742-2201 (Phone)
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