Social Security Literacy and Retirement Well-Being
We build upon the growing literature on financial literacy, which studies the prevalence of lack of knowledge about various financial issues, and analyze how much people know about the Social Security rules using a small pilot survey conducted in 2007, and a follow-up and extended survey funded by MRRC conducted in December of 2008. We then assess the consequences of the apparent prevalence of lack of information by individuals about the rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. We investigate the individual’s retirement and savings decisions under incomplete information and unawareness, in which a portion of the population does not know some or all of the rules of the system. We compare the outcomes in these cases to the outcome under full information, computing the welfare gain resulting from the acquisition of information regarding the Social Security system. Our analysis can illuminate the need for policies that foster knowledge of the system, which can improve welfare, and can result in better policy outcomes.
- Lack of basic knowledge about rules for obtaining Social Security benefits is widespread.
- Younger people are less informed than older people, however, only 70% of individuals aged 55 to 64 are aware of the minimum retirement age.
- Individuals who are reinterviewed show a large increase in knowledge about Social Security.
- The benefits of being fully informed about Social Security vary by age.
- Awareness could be increased by targeting messages pertinent to individuals based on their age or income level.
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Paper IDWP 2009-210