Wealthy or Wise: Social Security Knowledge, Retirement Savings Behavior and the Earned Income Tax Credit

Wealthy or Wise: Social Security Knowledge, Retirement Savings Behavior and the Earned Income Tax Credit

Richard Chard, David Rogofsky, and Joanne Yoong

Conference paper

Midwest Political Science Association Annual Meeting

2016

We use the novel, nationally-representative sample, the Understanding America Survey to study what people know about Social Security benefits and how that affects retirement savings and planning. We examine the general population and also a subset of the population eligible for the Earned Income Tax Credit (EITC). Our findings show that while Social Security benefit literacy is generally high, important disparities in program knowledge remain within the general population, including gaps by wealth, age, and ethnicity. We find that Social Security benefit literacy matters more than background factors, including wealth and age, for planning and saving behavior. However, when translating behavior into outcomes, benefit literacy is less predictive, suggesting that individual choices are moderated by other aspects of their financial capability, including their ability to save. While being knowledgeable is more predictive of individual choice, being wealthy (or from the right background) may still play a larger role in determining retirement preparedness. Interestingly we find that planning and savings behavior is not correlated significantly with receipt of the EITC, but that our retirement preparedness index which includes all the tax vehicles is negative and significant, suggesting that EITC households are indeed planning and saving but just NOT in the tax-advantaged vehicles. Our findings also suggest that individuals who perceive Social Security to be inadequate are more likely to be saving on their own for retirement. Finally, the findings highlight the relative importance of subjective beliefs about risk and trust in Social Security, compared to factual knowledge about the details of how Social Security works.