Working Paper: NBER ID: w28850
Authors: John B. Shoven; Sita Slavov; John G. Watson
Abstract: The Social Security trust fund will be exhausted in the early 2030s. The U.S. government will need to make a choice about how to address the impending trust fund exhaustion, but it is unclear what it will choose to do. This indecision leaves young and middle-aged workers not knowing whether they will face Social Security benefit cuts, payroll tax increases, or an increase in the full retirement age. This uncertainty about what will happen in the future causes young and middle-aged cohorts who are saving for retirement to make mistakes that could be avoided if the government decided earlier what will happen when the trust fund runs dry. This paper examines the cost of government indecision on Social Security reform. We calculate the value that people in different income classes and different birth cohorts would receive if the government decided now what it will do when the trust funds are exhausted. We find that the cost of indecision can be large. In some cases, the value of knowing today what the policy change will be in 2035 is worth more than two months of labor market earnings.
Keywords: Social Security; Retirement Planning; Indecision; Policy Reform
JEL Codes: G5; G51; H55; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government indecision regarding social security reform (H55) | Uncertainty in retirement planning (D14) |
| Uncertainty in retirement planning (D14) | Costly planning mistakes (G11) |
| Government indecision regarding social security reform (H55) | Costly planning mistakes (G11) |