ADELINE DELAVANDE, New University of Lisbon - Faculdade de Economia
Email: a-delavande@fe.unl.pt
SUSANN ROHWEDDER, The RAND Corporation
Email: Susannr@rand.org

The Social Security trust fund is predicted to be depleted by 2041. While there are several viable reform proposals to restore long-term solvency of the Social Security system, one important element that is critical to the success of any reform remains unknown: how will individuals respond to, for example, a cut of their Social Security benefits. Will they work longer or save more or both, and to what extent will their response make up for the cut in benefits? In this paper we use data from the HRS Internet Survey where we asked respondents directly what they would do if everyone's Social Security benefits were cut by 30 percent. At a qualitative level, we find important differences in the response by sex, marital status, and SES, among others. We conduct a detailed quantitative analysis of response to timing of Social security claiming and find that on average individuals would postpone claiming Social Security by 1.13 years. If this time was spent working by everyone then the annual Social Security benefit would drop on average by 20 percent rather than the initial 30 percent imposed by the reform. In other words the response to claim later and work longer would make up for one third of the initial cut in Social Security benefits.

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu

This paper applies structural models of retirement and saving of two earner couples to explore the effects on retirement of two actuarially neutral policies, which we know from previous work can have a substantial effect on retirement if heterogeneity in time preference rates is allowed. The main question being investigated here is whether using a model that explicitly incorporates the retirement interactions of two working spouses yields a different evaluation of policies than when a much simpler model that treats the retirement decisions of the second spouse as exogenous is used. The findings indicate that unless the question of interest is specifically related to joint retirement issues, the effects of the two actuarially neutral policies being investigated are roughly equal whichever model is estimated.

A second question explored in the paper is whether two earner and one earner households can be combined in the analysis. The effects of policy changes are clearly different for one earner and two earner households, but there is some evidence that the principal difference is due to the differing budget sets of the two groups. Though the estimated preference parameters are significantly different, the critical parameters governing responses to policy changes are similar. As a result, it seems plausible that unless the question being investigated involves looking at these two groups separately, the overall impact of the policy changes may be adequately assessed by combining the two groups, separately identifying them by a dummy variable.

A third question involves the magnitude of the effects for these two specific policy changes. Increasing the Social Security early entitlement age from 62 to 64 would reduce the level of retirement for husbands from two earner households by 4.4-4.6 percentage points at age 62, and by 5.1-5.7 percentage points for wives. In contrast, this policy change would induce husbands from one earner households to reduce the level of retirement by 10.2 percentage points at age 62. In a system of personal accounts, offering Social Security benefits as a lump sum instead of as an annuity would increase the level of retirement for husbands from two earner households by 7.1-8.1 percentage points at age 62 and by 8.9 percentage points for husbands in one earner households, and by 2.8-3.2 percentage points for wives in two earner households.

ALEXANDER W. BLOCKER, Boston University
Email: ablocker@gmail.com
LAURENCE J. KOTLIKOFF, Boston University - Department of Economics, National Bureau of Economic Research (NBER), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: kotlikof@bu.edu
STEPHEN A. ROSS, Massachusetts Institute of Technology (MIT) - Sloan School of Management, Yale University - International Center for Finance
Email: sross@mit.edu

Implicit government obligations represent the lion's share of government liabilities in the U.S. and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the U.S. Social Security System's net liability to working-age Americans. Marking this debt to market makes a big difference; its market value is 23 percent larger than the Social Security trustees' valuation method suggests.

BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org
KAREN E. SMITH, Urban Institute
Email: ksmith@ui.urban.org
ERIC J. TODER, National Bureau of Economic Research (NBER)

Income tax provisions affect the buildup of retirement assets during workers' careers and after-tax income following retirement. This paper uses the Urban Institute's DYNASIM model to simulate how potential changes in the tax treatment of retirement saving, Social Security benefits, and income from assets outside of retirement accounts may affect boomers' retirement incomes. Results show that changes in the income thresholds for taxing Social Security benefits have the largest impact on middle-income boomers, while changes in contribution limits for retirement saving plans and tax rates on capital gains and dividends have the largest impact on the highest income boomers.

WADE PFAU, National Graduate Institute for Policy Studies (GRIPS)
Email: wpfau@grips.ac.jp

Benefit reductions will likely be a part of the eventual Social Security reform in the United States. This research attempts to quantify the intragenerational and intergenerational impacts of different benefit reduction proposals on the incomes of the elderly. Reforms include across-the-board benefit cuts, price indexing, and reductions to the cost-of-living adjustment. Restoring the projected 75-year balance for the Trust Fund through benefit reductions will significantly lower benefits, though the impacts vary by type of reform. Nonetheless, the savings for the Social Security Trust Fund will exceed the accompanying increases in the poverty gap, leaving room to provide minimal income guarantees.

JONI LAVERY, National Academy of Social Insurance (NASI)
Email: jlavery@nasi.org
VIRGINIA P. RENO, National Academy of Social Insurance
Email: preno@nasi.org

About 6.5 million children under age 18 - or nearly 9 percent of all U.S. children - received part of their family income from Social Security in 2005. They include 3.1 million children who receive benefits as dependents of deceased, disabled, or retired workers and an estimated 3.4 million other children who do not themselves receive Social Security but live with relatives who do. Social Security benefits often make the difference in lifting children out of poverty. Of the 6.5 million children in families that received Social Security, fully 1.3 million were lifted out of poverty by Social Security income. Social Security is the most widespread form of life insurance for American families. Almost all U.S. workers - including men and women in the armed forces - have life insurance through Social Security when tragedy strikes. For example, Social Security continues to pay benefits to more than 2,000 children whose parents died in the terrorist attacks of September 11, 2001.

Children, their parents, and caretakers have an important stake in the future of Social Security. While the program is in strong financial shape over the next decade, it is not in balance for the full 75 years used to assess its finances. Policymakers are considering ways to balance the system by raising revenues, cutting benefits, or both. Because children's benefits are directly tied to benefits earned by their working parents, any across-the-board reduction in workers' benefits would cut insurance protection for children, unless they were specifically exempted. Moreover, even if children's own benefits were exempted, children would share the impact of reductions in benefits paid to others in their families. Analysts and advocates for children have an important role to fill in Social Security policy discussions.

MICHAEL S. FINKE, Texas Tech University, University of Missouri at Columbia - Department of Finance
Email: michael.finke@ttu.edu
SWARN CHATTERJEE, University of Georgia
Email: swarn@uga.edu

Preference for partial privatization of social security is explored using a 2004 sample of 7,565 young baby boomers. Two-thirds of the sample would choose partial privatization. While a greater proportion of higher-income, wealthier, and more educated respondents preferred private accounts, multivariate analysis reveals that intelligence has a stronger effect than socio-economic variables. An average of 43% would be invested in equities, but a surprising 35% would be invested in government bonds. Men and those with higher intelligence are more likely to prefer equities, while women prefer corporate bonds and the less educated, blacks, and respondents with children preferred government bonds.

EMMA AGUILA, RAND Corporation
Email: eaguila@rand.org

Many countries are including personal retirement accounts (PRAs) as part of their social security systems. PRA systems boost private savings at the macro level by converting a government financial liability into private wealth. At the micro-level, however, crowding-out effects on household savings could be offsetting some of this increase in private savings and may lead to inadequate preparedness for retirement. The author tests this hypothesis by using the Mexican social security reform of 1997 as a natural experiment, because only part of that system was changed from pay-as-you-go to PRAs. She finds that social security reform with PRAs does indeed crowd out household savings and recommends strengthening voluntary savings for retirement along with social security reform.