Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age
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Abstract
We use a US Social Security reform as a quasi-experiment to provide evidence on framing effects in retirement behavior. The reform increased the full retirement age (FRA) from 65 to 66 in two month increments per year of birth for cohorts born from 1938 to 1943. We find strong evidence that the spike in the benefit claiming hazard at 65 moved in lockstep along with the FRA. Results on self-reported retirement and exit from employment are less clear-cut, but go in the same direction. The responsiveness to the new FRA is stronger for people with higher cognitive skills. We interpret the findings as evidence of reference dependence with loss aversion. We develop a simple labor supply model with reference dependence that can explain the results. The model has potentially important implications for framing of future Social Security reforms.
Key Findings
- We use the 1983 Social Security reform that increased the Full Retirement Age (FRA) from 65 to 66 as a quasi-experiment to provide evidence on framing effects in benefit claiming and retirement behavior. The increase in the FRA is effectively a benefit cut, but it was “framed” as an increase in the age at which the normal retirement benefit is received.
- Although one cannot fully rule out alternative behavioral explanations such as social norms or reliance on SSA “advice,” the latter explanations seem at odds with the fact that workers with higher cognitive ability respond more to the FRA change.
- We develop a simple labor supply model with reference dependence that can explain the results. The model implies that framing a reform as a change in the reference point magnifies the impact, whereas framing it as a benefit cut dampens the response. The model has potentially important implications for framing of future Social Security reforms.
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WP 2010-243Publication Type
Working Paper