Optimal social security claiming behavior under lump sum incentives: Theory and evidence

• DOI: http://doi.org/10.1111/jori.12302
• Author: Ralph Rogalla,Raimond Maurer,Olivia S. Mitchell,Tatjana Schimetschek
• Published date: 01 March 2021
• Date: 01 March 2021

J Risk Insur. 2021;88:5–27. wileyonlinelibrary.com/journal/JORI

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DOI: 10.1111/jori.12302

ORIGINAL ARTICLE

Optimal social security claiming behavior

under lump sum incentives: Theory and

evidence

Raimond Maurer

1

|Olivia S. Mitchell

2

|Ralph Rogalla

3

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Tatjana Schimetschek

1

1

Department of Finance, Goethe University

Frankfurt, House of Finance Theodor‐

W.‐Adorno‐Platz, Frankfurt, Germany

2

NBER, and The Wharton School,

University of Pennsylvania, 3620 Locust

Walk, 3000 SH‐DH, Philadelphia, PA

3

School of Risk Management, Insurance,

and Actuarial Science, St. John's University,

101 Astor Place, New York, NY

Correspondence

Olivia S. Mitchell, NBER, and The Wharton

School, University of Pennsylvania,

3620 Locust Walk, 3000 SH‐DH,

Philadelphia, PA.

Email: mitchelo@wharton.upenn.edu

Funding information

Center for Scientific Computing of the

Goethe University Frankfurt; Research

Center SAFE, funded by the State of Hessen

initiative for research excellence, LOEWE;

Pension Research Council/Boettner Center

at The Wharton School of the University of

Pennsylvania; German Investment and

Asset Management Association; Deutsche

Forschungsgemeinschaft; Berkley

Fellowship Program at the School of Risk

Management of St. John's University's

Tobin College of Business; Metzler

Exchange Professor program

Abstract

Many Americans claim Social Security benefits early,

though this leaves them with lower monthly pay-

ments throughout retirement. We build a lifecycle

model that closely tracks claiming patterns under

current rules, and we use it to predict claiming delays

if, by delaying benefits, people were to receive a lump

sum instead of an annuity. We predict that current

early claimers would defer claiming by a year given

actuarially fair lump sums, and the predictions con-

form with respondents' answers to a strategic survey

about the lump sum. In other words, such a reform

could provide an avenue for encouraging delayed

retirement without benefit cuts or tax increases.

Moreover, many people would still defer claiming

even for smaller lump sums.

KEYWORDS

Annuity, delayed claiming, pension, Retirement, social security

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2019 The Authors. Journal of Risk and Insurance published by Wiley Periodicals LLC on behalf of American Risk and Insurance

Association

1|INTRODUCTION

Policymakers from virtually every nation seek ways to strengthen the financial status of their

national old‐age retirement systems (OECD, 2018). Nevertheless, frequently attempted para-

metric changes such as benefit cuts and retirement age increases tend to be extremely un-

popular. Consequently, this article examines a different approach, namely providing older

workers a cash lump sum if they defer claiming their Social Security benefits. In the United

States context, this would involve converting the delayed retirement credit now used to boost

the monthly benefit check into a partial lump‐sum payment at the deferred claiming date. In

other words, instead of forcing people to work longer, this approach provides substantial cash

incentives without imposing additional solvency concerns nor requiring additional system

subsidies.

In the United States, deciding when to retire and claim Social Security benefits is one of the

most consequential financial decisions people can make in later life, inasmuch as delaying

claiming from age 62 to age 70, for instance, can boost their old‐age annuity payments as much

as 75 percent. Despite the fact that lifelong benefits rise for delayed retirement, more than half

of American retirees claim their benefits before their so‐called “full retirement age”(of 66/67),

and all but a handful claim before the latest possible claiming age of 70 (Social Security

Administration, 2017, table 6.B5). High take‐up rates for early benefits are surprising to some,

inasmuch as many Americans have accumulated substantial wealth in defined contribution

pensions (Poterba, 2014), which they could live on while building higher Social Security

benefits.

1

Moreover, delaying Social Security benefits to receive a higher inflation‐adjusted

lifetime annuity provides a better financial deal than is available on the private insurance

market. Why retirees claim their benefits young, and what financial incentives might induce

them to delay claiming without making them worse off, are topics of keen interest to policy

reformers and deserving of additional research attention.

2

This article contributes to the literature on both life‐cycle portfolio choice and Social Se-

curity claiming patterns. To this end, we develop and calibrate a structural model of saving,

consumption, and claiming behavior using a novel survey that includes hypothetical questions

permitting us to identify key preference parameters.

3

Our “strategic survey”questions are

fielded in a nationally representative online survey of U.S. residents in the American Life Panel

(ALP), where we ask people when they plan to claim benefits under the system's current rules.

Using a moment‐matching approach, we calibrate preference parameters such that optimal

average claiming behaviors under the current Social Security system are in line with peoples'

claiming ages reported in the survey under the status quo. Next, we use our model to simulate

how optimal claiming behavior would change if the same people were provided a policy al-

ternative giving them their delayed benefits as a lump sum. These lump sums are designed to be

1

Additionally, Goda et al. (2018) reported that one‐third of Social Security early retirees had financial assets in their

Individual Retirement Accounts sufficient to finance at least two additional years of deferral, and about one‐quarter

could self‐finance at least 4 years of deferral. Other assets were not included in that calculation so that the likely impact

of liquidity constraints is probably far lower.

2

Some prior studies have examined retirement or claiming patterns under current Social Security rules (e.g., Coile et al.,

2002; Shoven and Slavov, 2014; Gustman and Steinmeier, 2005,2015; Yin, 2015; Hubener, Maurer, and Mitchell, 2016),

and research examining workers' decisions to claim company pensions include Chalmers and Reuter (2012). The

present article, however, is the first to cast this decision in a fully calibrated life cycle model and test predictions out of

sample.

3

A similar approach is taken by Ameriks et al. (2011) who use responses to hypothetical survey questions to calibrate

key preference parameters in their structural model of long‐term care and bequests.

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MAURER ET AL.