Working Paper: NBER ID: w21585
Authors: Frank N. Caliendo; Aspen Gorry; Sita Slavov
Abstract: We develop a model to study optimal decision making in the face of uncertainty about the timing and structure of a future event. The model is used to study optimal decision making and welfare when individuals face uncertainty about when and how Social Security will be reformed. When individuals save optimally for retirement, the welfare cost of uncertainty about the timing and structure of reform is just a few basis points of total lifetime consumption. In contrast, the cost of reform uncertainty can be greater than 1% of total lifetime consumption for individuals who do not save.
Keywords: Social Security; Uncertainty; Welfare; Retirement Planning
JEL Codes: C61; E21; E60; H30; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy uncertainty (D89) | welfare costs (I30) |
| optimal saving behavior (D14) | welfare costs (I30) |
| non-saving behavior (D14) | welfare costs (I30) |
| income level (D31) | welfare losses from timing uncertainty (D89) |
| timing of reforms (E69) | welfare costs for older individuals (J32) |
| policy uncertainty (D89) | optimal consumption-saving decisions (D15) |