How Policy Risks Affect Retirement Planning – Center for Retirement Research
introduce
Planning for a secure retirement is a huge challenge – the plan must cover all of a person’s remaining years and beyond, and take into account their legacy. An important obstacle to such planning is possible changes in the public policy environment: changes in Social Security programs could undermine the foundations of retirement planning, changes in the tax system could disrupt household finances, and ballooning government debt could undermine decision-making by raising interest rates and slowing the economy.
Given the recent increase in the scope and salience of policy uncertainty, this article explores how the recent rise in policy risk may affect the decisions and behaviors of individuals approaching retirement and those in retirement. The assessment begins with a survey of the academic literature on the nature of policy uncertainty and its impact on household behavior. It then combines the existing literature with two surveys: one of retirees and near-retirees investing in later life and another of financial advisors to understand the advice these investors may receive regarding policy risks. In summary, this approach focuses on how policy risks affect older Americans and applies findings from prior research to today's more uncertain environment. Additionally, while the existing literature focuses on a single program, policy, or event, this assessment looks at three policy areas simultaneously: 1) Social Security; 2) Medicare; and 3) fiscal policy—including federal debt and taxes.
The discussion proceeds as follows. The first section reviews the literature on policy uncertainty measurement and its estimated impact. Part II explores uncertainty in various policy areas, discussing what's at stake in the current environment and how unstable policies may impact families' retirement plans. Section 3 describes the nature of the new survey and presents results for individual retirement investors. Section 4 describes the findings from the financial advisor survey. The final section concludes that older Americans are acutely aware of increased policy uncertainty on many fronts and are reacting defensively. Interestingly, advisers have been relatively ambivalent about recent developments – maintaining an overall positive stance despite some specific concerns, which may explain why advisers have not had much of an impact on client confidence.
