|
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.
|
