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

Time: Tuesday September 4th, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Erzo Luttmer (Dartmouth College and NBER)

Discussant: Wouter Vermeulen (CPB)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: Policy uncertainty can reduce individual welfare in cases 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 and to estimate the impact of this uncertainty on individual welfare.  On average, our survey respondents expect 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 4 - 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 7 - 10 percent of expected benefits.

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