What do Americans know about retirement and what do they expect?
Joanne Yoong, University of Southern California Center for Economic and Social Research
In a letter to his friend Jean Baptiste LeRoy in 1789, the American Founding Father Benjamin Franklin wrote “In this world, nothing can be said to be certain except death and taxes”. Franklin’s letter far predated the United States’ Social Security Act of 1935, which set up a social insurance programme for American workers, providing them with at least some degree of certainty about income after retirement. But, in today’s environment, to what degree do Americans feel secure about their retirement? How well do they understand their own role and that of Social Security in contributing to retirement security?
Researchers at USC conducted a new study in 2016 to collect data on American’s understanding of retirement preparedness and the perceived role of Social Security. A special-purpose survey was designed and fielded as part of the Understanding America Study (UAS), a panel of approximately 6,000 individuals aged 18 or over representing the entire United States. The survey results highlight a worryingly-low level of retirement–related financial literacy.
Seventy percent of survey respondents are relatively uncertain about their retirement-related financial literacy, rating themselves either “somewhat” or “not too” knowledgeable. More worryingly, both self-assessed and actual knowledge of retirement-related financial principles are lower compared to the 2009 results. This is consistent with findings reported by Annamaria Lusardi from the US National Financial Capability Study, which found that basic financial literacy has been declining in each survey wave since 2009. Just as worryingly, disparities in knowledge by age, income and education remain present across all our measures of knowledge and preparedness, with Hispanics and Blacks at a particular disadvantage relative to non-Hispanic Whites.
The survey also shows that respondents are more pessimistic about Social Security, in comparison to the 2009 study. In particular, most respondents do not feel confident in the future ability of the Social Security system to pay their promised benefits, and a majority expect the Social Security system to fall short of providing enough for a reasonable standard of living.
Results also suggest a clear gap between respondents’ expectations about Social Security, and their actual understanding of how it works, suggesting that many Americans may not be maximising their benefits, or may not even be aware of their full entitlements. While most people are able to identify the general features of the Social Security system, a sizable group do not grasp critical details relevant to the impact of their own benefit claiming choices. About a quarter of future beneficiaries mistakenly believe that benefits need to be claimed at the time of retirement, while one in five are unaware that claiming early can reduce benefits. Just over 10% are not aware of disability entitlements, almost 20% are unaware of survivor benefits for children, and almost 40% do not know that spousal benefits can be claimed even if they do not have children.
Combined with the findings of the OECD/INFE Survey of Adult Financial Literacy Competencies on the correlation between financial knowledge and retirement planning, the UAS results suggest the potential for further negative effects.
Previous research has established a causal relationship between financial literacy and long-term planning. This new study reinforces that becoming and staying informed is a decision in itself that poses its own challenges.
Most UAS respondents feel that it is very important for the Social Security Administration to educate people about how to prepare financially for retirement. When asked to assess different sources of information, UAS respondents were most likely to trust the accuracy of retirement-related information either from Social Security or financial professionals. However, in practice, they most often turn to their social networks or receive information from their employers, rather than proactively seeking information from these trusted sources. A pragmatic and forward-looking financial education policy therefore requires working with diverse groups of both private and public stakeholders, not only to provide the right information but also to prevent the spread of wrong information.
How will policy makers and practitioners know which strategies are most effective at reaching which consumers, and how effective they are at altering behavior or financial outcomes?
Some of the responses to these questions may be found in the 2016 OECD Pensions Outlook. In parallel, recent data collection efforts such as the NCFS and the UAS and, more generally, the OECD/INFE survey that are focused on tracking both financial knowledge and behavior are helping to generate new and relevant findings. The ability to follow individuals over time, and to link financial knowledge to other types of knowledge and behavior is equally essential. Matching survey responses to actual financial transactions data and re-administering modules regularly will allow assessment of behavioral changes as well as the respondents’ financial status over the longer-term as the economic and policy environment evolves.
For now, it is important to support both initiatives that aim to improve retirement preparedness as well as sustained investments in measurement and evaluation to ensure that such initiatives are effective. It may be impossible to provide absolute certainty about financial well-being in old age, but more can certainly be done to ensure that expectations are properly aligned and that Americans are making informed decisions about retirement, including decisions about their own Social Security benefits.
 The UAS panel is Internet-based, which means that respondents answer surveys on a computer, tablet, or smart phone, wherever they are and whenever they wish to participate. While most panel members have their own Internet access, those who do not are provided with Internet access by USC. Surveys are designed by research teams around the world and final datasets are posted on the USC website with sample weights. A number of these surveys, including ours, focus on economic and financial decision-making. These areas are also highlighted in the work carried out by the OECD/INFE.
 See Lusardi and Mitchell, “The Economic Importance of Financial Literacy: Theory and Evidence,” Journal of Economic Literature, March 2014, vol. 52(1), pp. 5-44.