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

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.