Private Pensions and Public Policies

3. What People Don't Know about Their Pensions and Social Security

The role of employer-provided pensions and Social Security in shaping employees’ retirement and saving behavior has attracted an enormous amount of attention from both researchers and policymakers over the past twenty-five years. 1 In the research literature, the almost universal assumption is that workers are fully informed about the rules governing their employer- and government-provided pensions. However, to the limited extent that researchers have been able to test that assumption, results suggest that workers are less than fully informed (Bernheim 1988, Mitchell 1988, Gustman and Steinmeier 1989) and that providing information can affect their behavior (Clark and Schieber 1998; Bayer, Bernheim, and Scholz 1996; Bernheim and Garrett 1996; Madrian and Shea 2000). Despite a general lack of research on the role of information in retirement planning, policymakers have made information a central issue. The Social 57 What People Don’t Know about Their Pensions and Social Security alan l. gustman and thomas l. steinmeier 3 This paper is funded by a grant from the National Institute on Aging to the National Bureau of Economic Research. The authors would like to thank Richard Disney, William Gale, Olivia Mitchell, Joseph Piacentini, John Karl Scholz, Lawrence Thompson, Steven Venti, and participants in the Brookings Conference on Public Policies and Private Pensions, September 21–22, 2000, for their helpful comments. Data used in this study are from the Health and Retirement Study, which is supported by the National Institute on Aging. 1. See, for example, surveys by Lumsdaine (1996), Lumsdaine and Mitchell (1999), and Gustman and Juster (1996). 57 03-0238-8 chap3.qxd 3/9/04 10:51 AM Page 57 Security Administration (SSA), for example, recently began to mail workers statements of their accrued and projected benefits to improve their ability to plan for retirement; the SSA also has made a retirement planner available on its website. The U.S. Department of Labor has initiated several programs to examine the extent of workers’ lack of information and to improve their knowledge of pensions and of saving for retirement in general. Following the 1997 Savings Are Vital to Everyone’s Retirement (SAVER) Act, the National Summit on Retirement Savings, held in 1998, emphasized the need to educate the public about retirement planning through media campaigns and other means. In 2000 the Department of Labor celebrated the fifth anniversary of its Retirement Savings Education Campaign. And recent legislative proposals by Representative John Boehner of Ohio (HR 4747, 4748, and 4749) would significantly expand the scope of investment advice that employers are permitted to offer their employees. This chapter provides a comprehensive analysis of what workers (don’t) know about their pensions and Social Security. This analysis is based on information from the Health and Retirement Study, described below. Relative to previous findings and current policy issues, the paper provides five key sets of information . First, it uses more recent data than previous studies. This is important because of the significant changes in the pension universe and in Social Security that have occurred over the last fifteen years. Second, the paper focuses on the distribution of differences between respondents’ reports of requested information and linked reports obtained from records provided by the Social Security Administration or from detailed pension plan descriptions obtained from firms, examining the patterns of discrepancies at the level of the individual respondent more than did previous studies. Third, the paper examines the effects of poor information on economic behavior in order to assess the potential benefits of providing better information. Fourth, to improve understanding of misreporting and to provide a foundation for imputing pension and Social Security outcomes when data are not available, the analysis explores whether the differences between the cases that have linked Social Security and pension records and those that do not are related to demographic or other measures. Fifth, the appendix provides information of use to researchers, including an analysis of the relation between respondent-reported earnings histories and linked earnings histories from Social Security records. It also includes a set of equations that researchers can use to impute pension characteristics and plan values for cases without employer-provided pension plan descriptions and for researchers who do not have access to linked pension data. Our findings suggest that workers approaching retirement possess a great deal of misinformation about their pensions. Half of respondents with linked pension data correctly identified their plan type, but fewer than half could identify , within one year, the dates of their eligibility for early and normal retirement benefits. According to...