by David Knapp, University of Michigan
In this study, I conduct an empirical analysis of Social Security’s spouse and survivor benefits, otherwise known as auxiliary benefits, on a couple’s retirement and benefit claiming decision. Social Security was designed when most U.S. households were supported by a single income, but today most households have two incomes. The increase in dual income households may influence retirement behavior because a worker’s spouse is eligible to claim half of the worker’s Social Security benefits or all following the worker’s death, but the net gain is reduced based on the spouse’s own earnings history. While the incentives of Social Security’s benefit structure on the wage earner have been explored, previous research has not provided an understanding of how the complex interaction of primary and auxiliary benefits affect work and retirement incentives.
This project will estimate a dynamic programming model of retirement and benefit claiming decisions that accounts for couples’ heterogeneous work histories, complementarity of leisure, savings, stochastic medical expenses, partial retirement, and unretirement. Using the method of indirect inference, I will match simulated moments from reduced-form models in the retirement literature to moments using the same models estimated using data from the Health and Retirement Study (HRS). The HRS provides the full earnings history and private pension information for a large portion of the original cohort permitting my model to account for the nonlinear calculations of Social Security benefits and how heterogeneous earnings histories impact the benefit calculation.
My model, when fitted to the data, can be used to conduct counter-factual experiments on (1) the effect of decreases in spouse and survivor benefits on family retirement behavior, (2) changes in the benefit structure, via a more or less progressive system, on individual and family claiming behavior by income level, and (3) how increases in the number of dual income households are likely to change the Social Security benefit payment per contributing earner.