Social Security Literacy
and Retirement Well-Being
Hugo Benítez-Silva (SUNY-Stony Brook)
Berna Demiralp (Old Dominion University)
Zhen Liu (SUNY-Buffalo)
UM09-11
Introduction and Motivation
Financial Literacy has become an even
more important issue with the events of the
last year and a half
 Social Security Literacy is still a relatively
unexplored topic, while a high level of
knowledge by individuals is an underlying
assumption of most retirement models
 Anecdotal evidence indicates the level of
knowledge is not very high

Contribution



We provide evidence of the level of basic
knowledge about the Social Security
Retirement System using two waves of a
Survey funded by Stony Brook and MRRC
The second part of this project, assesses the
effect on Well-Being of the lack of knowledge
about the system using a Dynamic Life-Cycle
Model of Retirement
We are also able to impute the cost of acquiring
knowledge
SB 2007-2008 Social Security Study
Two telephone surveys conducted at Stony
Brook’s Center for Survey Research during
August 2007 (funded with a Seed Grant
from the V.P. for Research at SB), and
December 2008 (funded by MRRC)
 Samples of 500 and 507 observations,
nationally representative. 179 observations
of the 2008 survey were re-interviews

What is the youngest age at which an eligible worker can
apply for his or her own Social Security retirement
benefits? (All respondents 2007 and 2008)
Response
Less than 50
51 to 61
Exactly 62
63 to 64
Exactly 65
Over 66
Don't know
Total
Frequency
Percent
52
108
298
15
83
37
28
621
8.37
17.39
47.99
2.42
13.37
5.96
4.51
100
Cummulative
percent
8.37
25.76
73.75
76.17
89.53
95.49
100
What is the youngest age at which an eligible worker
can apply for his or her own Social Security
retirement benefits?
Sample
Response
2007
2008 new
respondents respondents
Less than 50
51 to 61
Exactly 62
63 to 64
Exactly 65
Over 66
Don’t know
# Obs.
9.57%
19.14%
41.98%
2.47%
15.43%
5.56%
5.86%
324
7.5%
15.5%
54%
3%
10%
6%
4%
200
2008 reinterviewed
respondents
6.19%
15.46%
55.67%
1.03%
13.4%
7.22%
1.03%
97
Total
8.37%
17.39%
47.99%
2.42%
13.37%
5.96%
4.51%
621
What is the earliest age of retirement at which Social Security would pay
you full, unreduced benefits?
80
% of respondents
70
65.74
69 69.07
60
50
40
30
20
19.44 19
18.56
10.31
8.33
10
9
6.48
3
2.06
0
Below 65
65 to 67
Over 67
Don't know
Responses
2007 respondents
2008 new respondents
2008 re-interviewed respondents
What is the maximum age at which you can claim Social Security retirement
benefits so that Social Security will adjust your benefits upward [because of
the delay in claiming benefits]?
50
45.36
45
% of respondents
40
35
32.5
30.86
30
22.8423.5
25
21.6
20.5
20
16.5
14.2
15
10.49
10
21.65
14.43
12.37
7 6.19
5
0
Below 65
65 to 69
Exactly 70
Over 70
Don't know
Responses
2007 respondents
2008 new respondents
2008 re-interviewed respondents
What is the minimum number of working years that qualify you to
receive Social Security Retirement Benefits?
40
34.5
35
32.99
% of respondents
29.9
30
25.62
25
20
23.15
21.5
19.44
19
17.28
14.51 14.43
12.5
15
12.5
11.34
11.34
10
5
0
Less than 10
Exactly 10
11 to 20
More than 20
Don't know
Responses
2007 respondents
2008 new respondents
2008 re-interviewed respondents
If you earned $10,000 in a given year from working after you began receiving
Social Security Retirement Benefits at age 62, do you think your Social
Security benefits would be reduced?
60
52.16
50.5
% of respondents
50
50.52
48.45
45
39.2
40
30
20
8.64
10
4.5
1.03
0
Yes
No
Don't know
Responses
2007 respondents
2008 new respondents
2008 re-interviewed respondents
What about if you earned $20,000 in a given year from working after you began
receiving Social Security Retirement Benefits at age 62, do you think your
Social Security benefits would be reduced?
90
77.32
80
70.99
% of respondents
70
66
60
50
40
30
26
19.75
20
18.56
9.26
10
8
4.12
0
Yes
No
Don't know
Responses
2007 respondents
2008 new respondents
2008 re-interviewed respondents
Knowledge of the Early Retirement Age
by age categories
.8
1
1.00
0.72
.6
0.65
0.53
0.46
0.43
0.32
0.17
0.20
0
.2
.4
0.45
18-34
35-44
45-54
2007
55-64
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
65 or more
Knowledge of the Early Retirement Age
by educational levels
.6
0.62
0.49
0.48
0.47
0.36
0.36
0.19
0
.2
.4
0.44
Less than HS
HS graduates
2007
Some college Bachelor's and above
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
Knowledge of Maximum Retirement Age
by age categories
.6
0.60
.4
0.40
0.38
0.36
0.33
0.20
0.18
0.17
0
.2
0.23
0.20
18-34
35-44
45-54
2007
55-64
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
65 or more
Knowledge of Maximum Retirement Age
by educational levels
.4
0.39
0.32
.2
.3
0.30
0.31
0.18
0.15
.1
0.14
0
0.05
Less than HS
HS graduates
2007
Some college Bachelor's and above
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
Knowledge of the Early Retirement Age
by income levels
.6
0.62
0.55
0.54
0.53
0.49
0.45
0.42
0.19
0
.2
.4
0.43
0.49
Less than $35K
$60K to $100K
$35K to $60K
Refused
Over $100K
2007
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
Knowledge of Maximum Retirement Age
.4
by income levels
0.37
0.31
.3
0.29
0.26
0.27
0.25
0.24
0.17
0
.1
.2
0.21
0.18
Less than $35K
$60K to $100K
$35K to $60K
Refused
Over $100K
2007
2008
Source: SB 2007/2008 Social Security Study (all respondents from each year)
The Dynamic Model (I)

We solve and simulate a Dynamic Life Cycle
Model of Retirement Behavior under uncertainty

Individuals face life uncertainty, income
uncertainty, health uncertainty, and employment
uncertainty, and optimally choose how much to
consume, save, work, and when to claim
retirement benefits
We model in detail the U.S. retirement system
and add unemployment insurance

The Dynamic Model (II)



The benchmark model does an excellent job at
replicating the actual data on the proportion of
individuals who claim benefits at each age.
This model assumes individuals know and
understand the complex incentive structure of the
retirement system in the United States.
We have shown this is hardly a realistic
assumption, but can we assess whether the
pervasive lack of knowledge is costing us much
in terms of welfare.
Actual vs. Simulated Retirement Claiming
Age
Actual (in %. 2006)
Simulated (%)
62
53.8
52.93
63
8.56
15.84
64
10.4
11.16
65
22.3
17.82
66+
2.7
2.22
The Dynamic Model (III)



One of the great advantages of utility based lifecycle models is that we can use them to perform
welfare calculations, in which we compare the
well-being of agents under different regimes
We can, for example, use the model to compare
the well-being under two different incentive
structures, or as in this research under two
different informational structures
We can compare the benchmark model with a
variety of possible informational structures
The Dynamic Model (IV)



We have re-solved and re-simulate the model assuming
that individuals do not know the details of the retirement
system, and behave mimicking the people around them.
This means, for example, what when an individual
reaches age 62, he does not make any complicated
calculation to decide whether she should claim benefits,
but behaves like the average person, who claims 52% of
the times at that age.
We know this behavior is suboptimal, but the key is to
compute the welfare gain from information, and with that
impute the cost that the individual is willing to bear to
access that better level of information
Results of the Model



We find that a large proportion of individuals would gain
from full-information. This proportion varies by age.
Around 95% of those who are 60 years old would sharply
benefit from better information. But only 28% of those who
are 40.
The welfare gain is computed in terms of willingness to
pay out of the current level of wealth. Technically, we find
that an average 60 year old who knows the rules of the
system would have to be compensated with more than
50% of his current wealth in order to accept the
suboptimal behavior we have explained.
The result hinges on the particular informational structure
we have assumed, but many others can be studied like
for example assuming the consequences of thinking that
the ERA is 63 or 64.
A ranking of informational structures
we are considering




Complete ignorance (e.g. “I believe the youngest
age cannot be anything other than 65”)
Ignorance with awareness about ignorance (e.g.
“I think it is 65, but I could be wrong.”)
Ignorance with a prior (e.g. “I guess it is 65 with
50% chance being correct”)
Accurate knowledge (e.g. “I am sure it is 62 and
I have double checked”)
How might incentives work with various
informational structures

Copying the majority around
 As

in the current model
Optimizing with given information
 Using

given knowledge as constraints
Searching for extra information
 Needs

further assumptions on search costs
Hiring professionals
 Needs
further assumptions on agency costs
Conclusions

We find Americans have a limited knowledge
of some of the basic rules of the Retirement
System

We find that a large proportion of Americans
would strongly benefit from access to good
information compared with suboptimal “me
too” strategies which do not take into account
the individual’s particular circumstances
Informational structures can be key to assess
the appropriateness and consequences of the
policy changes analyzed in our models
