Two members of the Center for Retirement Research (CRR) at Boston College, Laura D. Quinby and Gal Wettstein, published a brief last month, titled “How Does Media Coverage of Social Security Affect Worker Behavior?” The topic is of keen interest in our industry as Social Security provides a critical retirement savings component.
The study sought to determine how workers respond to news coverage about the health of Social Security. Survey respondents reacted to three potential headlines regarding Social Security.
- The Social Security Trust Fund Will Deplete its Reserves in 2034
- Social Security Fund Headed toward Insolvency in 2034, Trustees Find
- Revenues Projected to Cover Only 75% Percent of Scheduled Social Security Benefits After 2034
The challenges with Social Security are real and will require action to preserve this critical benefit for generations to come. However, the financial services industry has amplified these concerns about Social Security as a reason that participants should increase their savings to ensure against reduced Social Security benefits. The study from CRR seems to indicate that this messaging has little to no impact on savings.
However, for younger employees, more likely to be impacted by reduced benefits in the future, news reports of this nature seem to encourage participants to claim Social Security earlier. Unfortunately, early benefit claims are highly material to retirement health. Since benefits claimed early are at lower payments, Social Security claimants who claim early tend to receive significantly less over the remainder of their lives than those that defer.
In short, these stories, especially when reported through employee education meetings, don’t increase savings but do motivate claiming strategies that hurt retirement preparedness. Behavioral finance may be the key to improving retirement security; the success of automatic enrollment and escalation programs seem to indicate just that. But, to be most effective, sponsors and providers need to be consistent and intelligent about how information is conveyed to participants as behavioral finance can just as easily be a head wind for success. Nudging participants towards adequate savings rates works well; scaring them into saving more does not.
This phenomenon of singular data points plays out in a myriad of fiance, savings, investment, and retirement plan areas where a single set of headlines or news piece outside of the broader context does more harm than good. The fundamentals of establishing and operating effective retirement plans haven’t changed much in the last 30 years, but the number of distractions to these proven approaches has grown exponentially.
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