How Does Social Security Reform Indecision Affect Younger Cohorts?

34 Pages Posted: 31 May 2021 Last revised: 20 Jul 2021

See all articles by John B. Shoven

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Sita Slavov

George Mason University - School of Policy, Government, and International Affairs

John G. Watson

Stanford Graduate School of Business

Date Written: May 2021

Abstract

The Social Security trust fund will be exhausted in the early 2030s. The U.S. government will need to make a choice about how to address the impending trust fund exhaustion, but it is unclear what it will choose to do. This indecision leaves young and middle-aged workers not knowing whether they will face Social Security benefit cuts, payroll tax increases, or an increase in the full retirement age. This uncertainty about what will happen in the future causes young and middle-aged cohorts who are saving for retirement to make mistakes that could be avoided if the government decided earlier what will happen when the trust fund runs dry. This paper examines the cost of government indecision on Social Security reform. We calculate the value that people in different income classes and different birth cohorts would receive if the government decided now what it will do when the trust funds are exhausted. We find that the cost of indecision can be large. In some cases, the value of knowing today what the policy change will be in 2035 is worth more than two months of labor market earnings.

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Suggested Citation

Shoven, John B. and Slavov, Sita and Watson, John G., How Does Social Security Reform Indecision Affect Younger Cohorts? (May 2021). NBER Working Paper No. w28850, Available at SSRN: https://ssrn.com/abstract=3856830

John B. Shoven (Contact Author)

Stanford University - Department of Economics ( email )

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Sita Slavov

George Mason University - School of Policy, Government, and International Affairs ( email )

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John G. Watson

Stanford Graduate School of Business ( email )

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