Posts Tagged "actuarial reduction"
June 17, 2021
Workers Overestimate their Social Security
The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.
Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.
Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.
The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.
Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.
The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.
Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.
One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More