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© Maurer, Mitchell, Rogalla, & Schimetschek 1

http://www.salon.com/2011/03/15/future_of_social_security/

Will They Take the Money and Work?People’s Willingness to Delay Claiming Social Security

Benefits for a Lump Sum

© Olivia S. Mitchell with

Raimond Maurer, Ralph Rogalla & Tatjana Schimetschek

US Social Security Key For Many Elders

2

80.7

3

3

1.89.5 2

Social Security

Earnings

Pensions

Asset income

Cash publicassistanceOther

15.4

45.222.3

140.1 3

Overall

Top 20%Bottom 20%

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© Maurer, Mitchell, Rogalla, & Schimetschek 2

Claiming Age

Benefit as % of PIA

% Boost with 1 year delay

% Boost with N

year delay

62 70

63 75 7.14 7.14

64 80 6.67 14.29

65 86.67 8.34 23.81

66 93.33 7.70 33.33

67 100 7.15 42.86

68 108 8 54.29

69 116 7.41 65.71

70 124 6.90 77.14

Claiming Later Boosts Lifetime Social Security Annuity Current rules (NRA = 67)

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Authors’ calculations.

Yet Many Still Claim @ Age 62 (by Cohort)

4http://www.ssa.gov/retirementpolicy/research/early-claiming-alt.html

MOST claim < Full Retirement Age!

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• Would people delay claiming Social Security, if they got the benefit boost as an actuarially fair lump sum instead of higher annuity?

• If so, how would they adjust their labor supply?

Why?• Rational to prefer lump sum (LS) over actuarially fair

annuity if risk averse, uncertain wrt mortality/health/ political risk.

• May be healthier to work longer.

• And might help Social Security solvency.

Our question:

5

6Authors’ calculations.

Rewards for Later Claiming: Status Quo vs Lump Sum Experiment

ClaimingAge

Status Quo Lump Sum

Annuity Annuity Lump Sum

62 1,500 1,500 + 0

63 1,607 1,500 + 20,208

64 1,714 1,500 + 39,382

65 1,857 1,500 + 63,887

66 2,000 1,500 + 86,963

67 2,143 1,500 + 108,589

68 2,314 1,500 + 133,427

69 2,486 1,500 + 156,480

70 2,657 1,500 + 177,723

Eg: FRA = 67, Monthly Benefit (at age 62) = $1,500

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Emirical Analysis: RAND American Life Panel (ALP)

~6K respondents age 18+ taking frequent online surveysLaptops/Internet access given to those lacking boost

ssurvey representativeness.

Since 2006, ~440 online surveys: e.g.Financial decision-making, inflation expectations,

retirement preferences, health decision making, Social Security knowledge, and financial literacy.

Data available at ALP website (https://mmicdata.rand.org/alp/)

• We survey expected claiming ages & work plans/effort under Status Quo and a lump sum experimental treatment.

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The Experiment: Status Quo (SQ)

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For the sake of these questions, assume you are currently age 62 and single. You are thinking about when to claim your Social Security benefit.

The Social Security system allows you to claim your benefit anytime between age 62 and 70. On average, the system will neither lose nor make money no matter when people claim. If you claim your benefit at age 62, you will receive an estimated monthly amount of $1,500 for life.

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Your choice:Either- You can claim your Social Security benefit at age 62 and

receive that $1,500 monthly payment for life.OR- You can claim your Social Security benefit at a later age and

receive a higher monthly payment from that age on for life.

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Your choice:Either- You can claim your Social Security benefit at age 62 and

receive that $1,500 monthly payment for life.OR- You can claim your Social Security benefit at a later age and

receive a higher monthly payment from that age on for life.

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Your choice:Either- You can claim your Social Security benefit at age 62 and

receive that $1,500 monthly payment for life.OR- You can claim your Social Security benefit at a later age and

receive the same monthly payment of $1,500 from that age on for life, plus an additional lump sum payable at that later claiming age.

Lump Sum to Any Later Age

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Your choice:Either- You can claim your Social Security benefit at age 62 and

receive that $1,500 monthly payment for life.OR- You can claim your Social Security benefit at a later age and

receive the same monthly payment of $1,500 from that age on for life, plus an additional lump sum payable at that later claiming age.

Lump Sum to Any Later Age

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0 20 40 60 80 100

DelayedLum Sum

LumpSum

StatusQuo

Mos > age 62

24 38 71

724835

45

49.6

Claiming Ages: Status Quo vs. Lump Sum Experiment

Claiming Age post-62 in months

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Status Quo

Lump Sum

Mean 45 50

P 25% 24 35

Median 38 48

P 75% 71 72

Means LS-SQ, 1% significantEarly claimants (p25) respond to LS .

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Claim Mos > 62 under Status Quo v.s. Lump Sum Alternative

Status Quo Lump SumOverall 45.0 49.6Sex

Male 46.2 50.2Female 44.0 49.2

Marital StatusMarried 43.7 48.8Non Married 46.8 50.7

Age< 62 46.6 50.762-70 40.7 46.7

Educ. HS Dropout 39.8 45.8HS Graduate 34.8 40.0College+ 47.3 51.7

Self Rep LE

Optimistic 53.9 57.5Pessimistic 40.4 45.6

Lump Sum Payments under Lump Sum Alternative

0 20000 40000 60000 80000 100000 120000

Delayed LumpSum

Lump Sum

Lump Sum ($) at Claiming Age

31990 105143

64498

73026

22449

3753815960

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Who’s Most Likely to Delay Claiming? LS vs Status Quo

• Those who expect to live longer delay claiming for LS (more likely to live to get it).

• Those in debt want LS & claim later.

• Risk averse liked LS too, as do the more financially literate.

• Politically skeptical defer claiming more than the trusting.

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Months of FT work post age-62

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Status Quo Lump Sum

Mean 35 36

P 25% 2 12

Median 32 35

P 75% 53 54

• Lump Sum payments for later claiming also incentivize people to work longer, but on average only ~ 1 month.• So work effects weaker than on claiming.• Yet strong effect on people initially working lititle.

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Conclusions: • Delayed claiming an attractive option to enhance

retirement income security;

• Paying delayed retirement credit as deferred Lump Sum could: • Boost median claiming age up to 2 yrs.

• Early claimants delay claiming most.

• Boost median months of full-time work by ~half delayed

claiming months.

• Claiming delayed more w/ Lump Sum for those in debt, risk averse, financially literate, politically distrusting, and longer lived.

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Policy Relevance?

• Longer working lives also raise Social

Security payroll tax revenue & enhance

system solvency.

• Could be a ‘politically viable’ way to reform

Social Security.

• Reforms necessary, because system

running short of money. (Benefits to be cut

21% across the board, if no reform by ~2034.)

http://www.budgetmodel.wharton.upenn.edu/20

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Thank you!

For more information:Wharton’s Pension Research Council: http://www.pensionresearchcouncil.org/

Books and working papers: http://www.pensionresearchcouncil.org/publications/books.php