The Retirement Game
Some games are designed in a way that causes people to believe one strategy is the dominant strategy on first glance. One such “game” that this website indicates is retirement plans. In a simplified version of the retirement plan game, people are promised either a set yearly payout over a period of time or a lump sum payout at the end of that same period of time. At first, the latter seems to be the more profitable option because the individual is promised a sum larger than the amount that one would get if getting the smaller yearly allowance. This first instance opinion does not take into account that the total amount of funds available to be distributed is not enough to give every person the amount they were told they would be given. Taking into account the actual funds anyone could receive, it becomes clear that the multiple small payments is the better choice. Even when analyzing every possible combination of lump sum and small payment participants, being a small payment participants is always more profitable solely because they get to the limited amount of money first.
This small game model holds many parallels to reality. Analysis shows that for Social Security benefits, that there is no benefit to waiting until age 70 to receive benefits, that funds are not sufficient to give everyone what they were promised, and that in years to come, those that wait to receive their benefits may receive less because others are getting the money first. This raises the question, why do people wait? The current generation appears to be well aware that they may never get to see any amount of Social Security benefits. So why wait? I speculate that there is a sort of faith in the government to hold true to their promises that keeps most people waiting. Perhaps a “good things come to those that wait” mindset plays a part as well.
At some point when the United States was not in perpetual debt, the retirement game would likely have been entirely different; played by the same rules but using a different strategy to succeed. In a model where there are enough funds to give everyone the lump sum payment, that would clearly be the dominant strategy. Looking at the current situation, it’s likely that the rules to the game will soon change as funds become increasingly scarce. What will the future hold for my generation? We will have to wait for our opponent to make their move first.
Source: http://www.marketoracle.co.uk/Article51784.html