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Is there adverse selection in the U.S. social security system?

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  • Beauchamp, Andrew
  • Wagner, Mathis

Abstract

Despite facing some of the same challenges as private insurance markets, little is known about the role of adverse selection in Old-Age Social Security. Using data from the Health and Retirement Study, we perform the unused observables version of the positive correlation test, and find robust evidence that people who expect to live shorter lives both choose smaller annuities – by claiming benefits early – and are less costly to insure, implying adverse selection in the system. Results are consistent when using either subjective expectations or observed longevity. Decomposing the sources of adverse selection we find that health, demographics, occupation and financial information together account for much of the positive correlation between mortality and claiming. IV estimates help to rule out moral hazard.

Suggested Citation

  • Beauchamp, Andrew & Wagner, Mathis, 2020. "Is there adverse selection in the U.S. social security system?," Economics Letters, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:ecolet:v:189:y:2020:i:c:s0165176520300318
    DOI: 10.1016/j.econlet.2020.108995
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    More about this item

    Keywords

    Adverse selection; Social security; Optimal policy;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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