Social Security Might Be Too Much of a Mystery to Affect Savings: Economists

The economists found a little evidence that a new 1983 Social Security tax increase might have reduced the savings rate for self-employed people ages 40 to 64.

They found no sign that families with college-age or school-age children spent more on life insurance as a result of the college student benefits cut.

"While we cannot rule out the possibility that the reform affected life insurance purchases, we have no evidence to suggest that it did," the economists write.

The economists suggest three interpretations of their findings:

• Problems with the data are hiding Social Security change-related shifts in consumer behavior.

• People choose to work longer, rather than save or insure more, when they expect Social Security changes to cut their benefits.

• Typical people lack knowledge about their Social Security benefits and are unaware of Social Security benefits changes.

The economists cite survey data indicating that even people close to retirement age make large errors when estimating their future Social Security benefits.

"It is likely that many individuals are unaware of or do not pay attention to how changes in policy rules affect their benefits, particularly for small benefit changes," the economists write. "Lack of knowledge or attention is consistent with finding weak evidence of responsiveness to a tax increase but no evidence of responsiveness to a benefit cut. Since payroll taxes are deducted immediately from individuals' paychecks … a tax increase is likely to be more salient and well-understood than a benefit cut."

The economists do not talk directly about the role insurance agents, financial advisors, accountants or other financial professionals might play in helping consumers understand Social Security.

The results imply, however, that financial professionals might play an especially helpful role in helping consumers notice, understand and address policy changes that are likely to cut their benefits many years in the future.

— Read Health Care Costs to Swamp Social Security COLAs: HealthView Studyon ThinkAdvisor.