Explore the Costs and Benefits of Social Security Reforms
Findings

Our theoretical analysis highlights that optimal policy design must account for several key channels through which health impacts retirement decisions: labor supply nonconvexities, productivity loss, and mortality risk. Specifically, we find that unhealthy workers optimally face lower labor wedges because of their higher cost of continued labor while healthy workers benefit from policies incentivizing delayed retirement. 

Quantitatively, our estimation shows that labor supply nonconvexities significantly drive retirement behavior in the US, more so than productivity or mortality risks alone. 

Among policy instruments, retirement benefits through the US Social Security system have the largest impact on retirement choices and on welfare, followed by Medicare, retirement savings subsidies (such as tax exemptions for Roth plans and tax deferrals for traditional IRAs and 401(k) plans), then income taxes, and finally disability insurance. 

Our results suggest that increasing the claiming-age dependence of Social Security benefits relative to the status quo would yield substantial welfare gains and could pay for itself with an MVPF of infinity while uniform increases to the NRA would be welfare decreasing once one accounts for endogenous retirement. 

Overall, our results suggest that flexible retirement policies, rather than rigid increases in the retirement age alone, are optimal from both welfare and fiscal perspectives.

 Future research and policy discussions should, therefore, focus on nuanced yet simple adjustments to social insurance programs that align worker and government incentives.