Americans have a generally vague understanding of the way that Social Security benefits work, and that vague understanding leads to an overestimation of the potential impact of such benefits on retirement financing, which is a contributing factor to diminishing retirement savings Americans are putting away. This is according to a study by the University of Southern California’s Center for Economic and Social Research, cited by the Boston College Center for Retirement Research.
“Workers ‘would probably have fewer regrets after retirement’ if they were better informed, the study concluded. And many retirees in the study have regrets,” the Boston College account of the results reads. “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.”
Researchers compared respondent guesses of future benefits with their own more precise fact-based estimates of what those benefits would look like for relevantly-situated retirees, and determined likely working paths for respondents based on factors such as age, gender, prior and current earnings and highest level of education completed. Researchers then took that information and applied it to Social Security’s formula for the calculation of 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,” Boston College describes of the findings. “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 were found to have overestimated their retirement earnings the most, which is understandable from the perspectives of the researchers since this is the age group that is naturally less inclined to be thinking about retirement at that stage of their lives, the post notes. However, that general lack of concern for retirement at an early age is unfortunate since the earliest decisions related to retirement financing often result in the best outcomes, as noted by Boston College.
“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,” the post reads. “What does all this mean for individual retirees? The more optimistic workers are, the more likely they are to save less than they will need in the future, the researchers found.”
Read the post at Boston College’s Center for Retirement Research.