rm findley

by Anna McEntire

USU research explores how Social Security and private programs can help provide for a secure retirement.

Many of us have already heard: there’s a large-scale fiscal storm brewing on the horizon.

At the edge of our line of sight, say, 10-20 years down the road, dark clouds are forecasting a crisis for the Social Security program in the United States.

“It’s the trillion-dollar question facing policymakers right now,” said Scott Findley, assistant professor in USU’s economics and finance department. “It’s expected that there will be a fiscal tsunami when it comes to the government’s ability to provide Social Security and Medicare. Right now, economists are trying to determine what reforms can be made to cope with inadequate revenues.”

The irony of it, though, is that traditional economic theory does not generally support the primary justification for Social Security in the first place. And, it’s much harder to fix something if you can’t understand why the program should even exist.

“Standard economic models of life-cycle decision making have assumed that people are fully rational ‘super computers’ with perfect foresight and self control, but the most frequently cited reason for why we have Social Security is that people are short-sighted and/or don’t have the self control to save for retirement,” said Findley. “This is a big paradox to economists because the largest tax and transfer program in the world is justified on grounds that don’t follow from standard economics.”

Findley, along with several of his colleagues, is working to bridge the gap between economic theory and fiscal reality through behavioral modeling—building economic models with behavioral predictions that are consistent with the decisions and actions that people actually make throughout the course of their lives. He is especially interested in the areas of saving, spending, how much to work and when to retire.

“If everyone saved adequately, there would not be as large a need for Social Security–and no impending insolvency of the system. But the reality is that many people don’t save adequately.”

“If everyone saved adequately, there would not be as large a need for Social Security—and no impending insolvency of the system,” said Findley. “But the reality is that many people don’t save adequately.”

Some people don’t have the ability, or don’t exert the effort, to calculate how much money they should save for retirement. Instead, they just use a “rule of thumb” and save a fixed small portion of their income, regardless of what they’ll need later on; others are “hand to mouth,” meaning they don’t save at all.


“In a way, Social Security mimics a compulsory savings program, thus providing for spending resources during retirement,” said Findley. “The question is, does it work in a way that improves an individual’s overall well-being?”

Findley and his USU colleague, Frank Caliendo, have found that Social Security can often improve an individual’s lifetime well-being, especially when they exhibit irrational behaviors—misestimating their coming benefits, not planning ahead, spending impulsively or not saving anything at all. They have studied how pronounced these behavioral shortcomings need to be in order to justify a Social Security program.

By taking into account the tendencies of people not to plan very far ahead, Findley is working to create more accurate models for calculating the optimal level of Social Security benefits that people should receive to provide for retirement spending, while maintaining a motivation for people to save on their own. Findley and Caliendo were awarded the 2008 Young Economists Award from the International Institute of Public Finance for their work in this area.

As it is, Social Security is currently the single largest fiscal outlay within the federal budget. Approximately one-third of retirees have no income source other than Social Security, and Social Security is the largest income source for two-thirds of retirees.

By taking into account the tendencies of people to not plan very far ahead, Findley is working to create more accurate models for calculating the optimal level of Social Security benefits that people should receive.

The problem is that Social Security will experience significant financial stress in the near future due to the aging of the enormous baby-boom generation (which will increase the number of retirees), an increased life expectancy (which increases the average length of retirement), and a lower fertility rate (which means a lower growth rate in the labor force being taxed). These factors will create a fall in the ratio of workers being taxed to pay for each retiree’s benefits from three to two by 2030—and, since Social Security is a pay-as-you-go system, the government will be unable to pay the full amount of scheduled benefits.

To deal with this fiscal shortfall, the government can let benefits fall, increase taxes or both. In the meantime, smaller measures can be taken to help change consumers’ attitudes about saving on their own.

Findley has found that when the government informs people about their coming Social Security benefits (as in the annual statement sent to each income earner), everyone is better off if the government errs slightly on the side of pessimism, giving consumers a more conservative estimate of their benefits.

“At points in the past, one used to see a lot of people who were overly optimistic about the amount of their Social Security benefits, and their low saving behavior was a reaction to that excessive optimism,” said Findley. “As a result of this, Congress passed legislation in the 1990s requiring the Social Security Administration to send out annual statements to give people a more accurate picture.”

When people receive those statements, they can see how their benefits will likely translate into their monthly post-retirement income. That number is often much less than what they were expecting.

“I’ve found that those estimates, especially when they are calculated conservatively, can provide a little more motivation for private saving, which can result in both individual and economy-wide benefits,” said Findley.

And, if that doesn’t work, a new program is working to “default” people into saving.


The Save More Tomorrow (SMarT) plan was developed by Richard Thaler and Shlomo Benartzi (of the University of Chicago and UCLA, respectively) to help people save more for retirement. The SMarT plan’s success lies in the fact that it is uncomplicated, yet quite clever.

“The SMarT program is a simple idea,” said Findley. “People tend to procrastinate saving, and the program capitalizes on that shortcoming. People don’t want to reduce spending money today, but most are happy to promise to put a larger portion of their future raises into savings.”

Participants of SMarT commit today to save (by authorizing their employer to withhold) a higher fraction of future wage or salary increases—say 10 to 30 percent of their future raises—which is appealing because it allows them to procrastinate saving today, while increasing their overall saving capacity without ever “feeling it.”

Findley and his colleagues have found that the SMarT plan can come close to approximating rational saving behavior. They have also found that the amount that people need to save in the SMarT plan—the “critical level”—is in fact quite low for it to be successful, even if wage growth is slow, even if the return on savings is low and even if enrollment in the plan is delayed until later in life.

“SMarT can proxy optimal saving behavior as if someone had no problem with saving adequately on their own,” said Findley. “It also capitalizes on people’s comfort with the status quo—people are usually too lazy to opt out.”

Findley has also found that the SMarT program could help a household cope with possible future shortfalls of Social Security.

“Under reasonable conditions, if a household saves just 20 percent of their future wage or salary raises via a SMarT plan, that can provide enough additional private retirement savings to offset potential cuts in Social Security benefits,” said Findley.

“SMarT can proxy optimal saving behavior as if someone had no problem with saving adequately on their own. It also capitalizes on people’s comfort with the status quo–people are usually too lazy to opt out.”

Still more, SMarT savings could have larger economy-wide benefits, even for people who don’t participate, because it could raise national saving, which in turn could lead to a healthier economy at large.

“You hear a lot in the news about how spending jumpstarts an economy,” said Findley. “This applies to short-term intervals, but in reality, saving is the real virtue to promote the long-term health of an economy. A SMarT plan has the potential to increase aggregate saving and investment in the economy to the point that its long-term trajectory can improve significantly.”

“My research program has made me alarmingly aware of the need for people to take the future seriously and prepare for rainy days,” said Findley. “There is a non-trivial possibility that people’s well being during retirement will be in jeopardy, and that future generations won’t be able to experience an increasingly higher standard of living.”

With Findley’s behavioral models, people’s very human flaws may be able to work to benefit their future well being.