How Do Retirement Investors and Financial Advisors View and Cope with Policy Risk?

Retirement planning is a complicated decision problem: the plan must cover all of a person’s remaining years and beyond, considering their legacy. The problem is further complicated by the potential for shifts in the public policy environment: changes to social insurance programs can undermine the plan, changes to the tax system can sow disarray in household finances, and burgeoning government debt can undermine decisions through unanticipated interest rate hikes and slower economic growth. 

Anecdotally, policy uncertainty in the United States has grown markedly since the hotly contested 2024 presidential election and subsequent administration change. Given the recent increase in the scope and salience of policy uncertainty, this paper explores how this uptick in policy risk has affected the decisions and behavior of near retirees and retirees. That assessment begins with a survey of the literature on the nature of policy uncertainty and its impact on household behavior. It then integrates the existing literature with two surveys: one of retirees and near-retirees investing for their late-life years, and another of financial advisors to understand the advice that these investors might be receiving about policy risk. Together, this approach focuses on how policy risk impacts older Americans and applies results from previous research to today’s more uncertain environment. Moreover, while the existing literature focused on a single program, policy, or event, this assessment looks simultaneously across three policy areas: 1) Social Security; 2) Medicare; and 3) fiscal policy – comprised of the federal debt and taxes. 

The discussion proceeds as follows. The first section reviews the literature on the measurement of policy uncertainty and its estimated impacts. The second section explores uncertainty in various policy areas, discussing the stakes in the current environment and how unsettled policy might affect households planning for retirement. The third section describes the nature of the new surveys and presents the results for individual retirement investors. The fourth section describes the results of the survey of financial advisors. The final section concludes that older Americans are keenly aware of the increase in policy uncertainty on many fronts and are taking defensive responses. Interestingly, advisors are relatively ambivalent about recent developments – retaining a generally positive position, albeit with some specific concerns, which likely explains why advisors do not have much impact on the confidence of their clients.