Erzo F.P. Luttmer and Andrew A. Samwick write,
On average, our survey respondents expect to receive only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average individuals would be willing to forego around 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.
My comments:
1. I believe that most economists think that even in the worst case individuals would get more than 60 percent of the benefits that they are promised.
2. Somehow, I am reminded of Foolproof, in which the attempt to reduce risk has the reverse effect. That is Social Security was supposed to increase the certainty of people’s retirement incomes, but apparently it is not doing so.
So, are economists and the survey takers really assessing the future benefits using the same value measure? I strongly suspect they aren’t.
1. I believe that most economists think that even in the worst case individuals would get more than 60 percent of the benefits that they are promised.
But ideally everyone should get the same benefit. $200/week for everyone.
So if politicians just promise harder they can cut benefits.
Re: 1) Don’t forget about the heterogeneity they highlight. For all kinds of reasons, any sort of reform will likely make the payouts means-tested/progressive. Secondly, since reform is also likely to include raising the retirement age, there will be heterogeneity in total benefits due to differences in life expectancy. If we assume the most likely reform will involve a combination of the above changes, even if the aggregate cuts are not that steep it is completely rational rational for many individual people to expect less than 60% of current-law benefits including anyone who is a) in the top 10-20% of lifetime income b) a smoker c) a non-white male. Those categories include a lot of people. I don’t know what sampling methodology they used, but they would have to be careful to see that it matched overall US demographics. Furthermore, if you’re not a policy wonk, once you accept that your benefits are not sacrosanct and on the chopping block, then you have to consider the possibility they become zero. From a planning perspective, given the anxiety involved and the reality of loss aversion, it’s better to set your expectations to zero, psychologically write it off, and treat any benefits you do get as gravy. If you’re 35 right now and think that changes might not happen for say, 10 years, it’s way better to oversave now and end up with more than you thought than it is to undersave now and lose more than you expected. That’s what I do. The policy wonk in me looks and my future and cuffs my personal social security haircut at 50-75%. The financial planner in me operates on the assumption I will get nothing.
There are many sources of uncertainty, financial, social, political, temporal, existential, personal. While lowering uncertainty is valued, the question must be whether anyone believes it could or would be and by how much, or whether such action is more likely to increase it or come at such cost uncertainty becomes attractive. If people really believed this we should be seeing more private savings and insurance but they probably feel the similar uncertainties apply to them.