(Image: Thinkstock)

Social Security benefits cuts may have little effect on U.S. workers’ retirement savings because few U.S. workers seem to know much about what their benefits will be.

A team of four economists has suggested that possibility in a new working paper on how access to Social Security benefits affects private savings.

(Related: Helping Late Starters with Long-Term Care)

A working paper is an informal discussion draft of an academic research paper.

Sita Slavov, a public policy professor at George Mason University in Fairfax, Virginia, and three colleagues have published the Social Security savings impact working paper behind a paywall on the website of the National Bureau of Economic Research.

The economists used government survey data from the 1960s through the 1990s, and information about tax and benefits changes, to look for evidence that major changes in Social Security benefits had affected consumer behavior.

Social Security changes that took effect in 1977 had no clear, statistically significant effect on people’s savings, the team concludes.

The economists also looked at another batch of data related to 1983 Social Security changes. The economists came up with several ways to measure the impact of the 1983 changes on consumer behavior. One involved changes in actual savings rates.

Another strategy involved a 1983 Social Security benefits cut for children who were in college when their parents died.

The economists found a little evidence that a new 1983 Social Security tax increase might have reduced the savings rate for self-employed people ages 40 to 64.

They found no sign that families with college-age or school-age children spent more on life insurance as a result of the college student benefits cut.

“While we cannot rule out the possibility that the reform affected life insurance purchases, we have no evidence to suggest that it did,” the economists write.

The economists suggest three interpretations of their findings:

  • Problems with the data are hiding Social Security change-related shifts in consumer behavior.

  • People choose to work longer, rather than save or insure more, when they expect Social Security changes to cut their benefits.

  • Typical people lack knowledge about their Social Security benefits and are unaware of Social Security benefits changes.

The economists cite survey data indicating that even people close to retirement age make large errors when estimating their future Social Security benefits.

“It is likely that many individuals are unaware of or do not pay attention to how changes in policy rules affect their benefits, particularly for small benefit changes,” the economists write. “Lack of knowledge or attention is consistent with finding weak evidence of responsiveness to a tax increase but no evidence of responsiveness to a benefit cut. Since payroll taxes are deducted immediately from individuals’ paychecks … a tax increase is likely to be more salient and well-understood than a benefit cut.”

The economists do not talk directly about the role insurance agents, financial advisors, accountants or other financial professionals might play in helping consumers understand Social Security.

The results imply, however, that financial professionals might play an especially helpful role in helping consumers notice, understand and address policy changes that are likely to cut their benefits many years in the future.

— Read Health Care Costs to Swamp Social Security COLAs: HealthView Studyon ThinkAdvisor.