The Behavioral and Consumption Effects of Social Security Changes



Social Security’s Trust Fund is projected to be exhausted in 2034. A variety of changes to the program have been put forward that would either push this date out into the future or delay it indefinitely. Some of these changes would cut benefits – e.g., increasing the Full Retirement Age (FRA) to 69 – while others would increase program revenue – e.g., increasing the payroll tax. While Social Security’s Office of the Chief Actuary projects the financial impact on the program of a wide variety of changes, understanding the impact of these changes on recipients’ behavior and well-being is also a valuable exercise. This paper uses the Gustman and Steinmeier structural model to analyze the effects of four changes to the Social Security program on recipients’ retirement timing and household consumption.

This paper found that:

  • The two policies that reduce benefits – an increase in the FRA to 69 and a reduction in the COLA of 0.5 percentage points – would increase the length of workers’ careers by delaying retirement.
  • The two policies that increase revenues – an increase in the payroll tax to 7.75 percent and an increase in the cap to cover 90 percent of earnings – would have a negligible impact on retirement timing.
  • For the benefit-based policies, the reduction in consumption relative to current policy is relatively high post-retirement, with the COLA adjustment having an increasing effect with time.
  • Policies that increase revenue have little effect on consumption after retirement but have a consistent effect during the working life.

The policy implications of this paper are:

  • Policymakers can expect individuals to delay retirement more in response to Social Security changes that reduce benefits than from changes that increase revenue.
  • In terms of consumption, policymakers considering benefit cuts versus revenue increases face a tradeoff: a sharper reduction in consumption over the shorter span of retirement or a smaller, but more prolonged, reduction in consumption during the working life.

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