The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security

Erzo Luttmer and Andrew Samwick

No 21818, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Policy uncertainty can reduce individual welfare when individuals have limited opportunities to mitigate or insure against consumption fluctuations induced by the policy uncertainty. For this reason, policy uncertainty surrounding future Social Security benefits may have important welfare costs. We field an original survey to measure the degree of policy uncertainty in Social Security and to estimate the impact of this uncertainty on individual welfare. On average, our survey respondents expect to receive only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average individuals would be willing to forego around 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.

JEL-codes: D89 H55 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-pbe
Note: AG PE
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Citations: View citations in EconPapers (5)

Published as Erzo F. P. Luttmer & Andrew A. Samwick, 2018. "The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security," American Economic Review, vol 108(2), pages 275-307.

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Journal Article: The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security (2018)
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