How Policy Risks Affect Retirement Planning – Center for Retirement Research
Introduction
Planning for a secure retirement is a big challenge – the plan must cover all of a person’s remaining years and beyond, taking into account their legacy. A key obstacle to such planning is possible shifts in the public policy environment: changes in social insurance systems can undermine the foundations of the retirement system, changes in the tax system can disrupt family finances, and rising government debt can undermine decisions by raising interest rates and shrinking the economy.
Given the recent increase in the scope and importance of policy uncertainty, this paper examines how this recent increase in policy risk may affect the decisions and behavior of near-retirees and retirees. That assessment begins with a survey of the academic literature on the nature of policy uncertainty and its impact on family behavior. It then combined the existing literature with two surveys: one of retirees and near-retirees investing their money in their later years, and one of financial advisors to understand the advice these investors might be getting about policy risk. Together, this approach focuses on how policy risks affect older Americans and applies previous research findings to today’s uncertain environment. In addition, although the existing literature focuses on a single program, policy, or event, this review looks simultaneously at three policy areas: 1) Public Safety; 2) Medicare; and 3) fiscal policy – which includes government debt and taxes.
The conversation goes like this. The first section reviews the literature on the measurement of policy uncertainty and its relative impact. The second section discusses the uncertainty in various policy areas, discussing the role of the current situation and how unresolved policy can affect family retirement planning. The third section describes the nature of the new survey and presents the results for individual retirement investors. The fourth section describes the results of the study of financial advisors. The final section concludes that older Americans are more aware of increased policy uncertainty in many areas and are adopting defensive responses. Interestingly, advisors have mixed opinions about recent developments – they maintain a generally positive attitude, although there are specific concerns, which may explain why advisors do not have a significant impact on their clients’ trust.
