Social Security Literacy and Retirement Well-Being

Abstract

We build upon the growing literature on financial literacy by studying people’s knowledge of Social Security rules and how limited knowledge of these rules affects their retirement and savings decisions. First, we present results of two phone surveys conducted in 2007 and 2008, both of which are aimed to investigate how much people know about the incentives built into the Social Security system. The results of the surveys reveal that less than half of the respondents knew the answers to most of the questions on Social Security. In some cases, about 20 percent of the respondents knew the correct answer. We also find that knowledge of Social Security rules increases with age and education, but there does not seem to be a strong observed correlation with income. In the second part of the paper, we assess the consequences of having limited knowledge of rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. In particular, we investigate the individual’s retirement and savings decisions under a form of “unawareness,” � We gratefully acknowledge the financial support of the V.P. for Research at SUNY-Stony Brook through a Seed Grant which allowed us to start this project. The U.S. Social Security Administration has funded this project through grant UM09-11 at the MRRC, its support in this, and other related projects, has made this research a reality. The findings and conclusions expressed are solely those of the authors and do not represent the view of SSA, any agency of the Federal Government or the MRRC. The hard work of the administrators and interviewers at the Center for Survey Research at Stony Brook made it all this possible and we are very thankful to all of them. The key role played from the very beginning by Linda Pfeiffer at the Survey Center deserves special mentioning. Interestingly, Linda retired shortly after finishing helping us on our project. She claims this was unrelated to the project and its results. Anna Nesterenko provided superb research assistance. Any remaining errors are our sole responsibility.