WILL THEY TAKE THE MONEY AND WORK? PEOPLE'S WILLINGNESS TO DELAY CLAIMING SOCIAL SECURITY BENEFITS FOR a LUMP SUM

• Author: Olivia S. Mitchell,Raimond Maurer,Tatjana Schimetschek,Ralph Rogalla
• DOI: http://doi.org/10.1111/jori.12173
• Published date: 01 December 2018
• Date: 01 December 2018

WILL THEY TAKE THE MONEY AND WORK?PEOPLE’S

WILLINGNESS TO DELAY CLAIMING SOCIAL SECURITY

BENEFITS FOR A LUMP SUM

Raimond Maurer

Olivia S. Mitchell

Ralph Rogalla

Tatjana Schimetschek

ABSTRACT

This article investigates whether exchanging Social Security delayed

retirement credits, currently paid as increases in lifelong benefits, for a

lump sum would induce later claiming and additional work. We show that

people would voluntarily claim about 6 months later if the lump sum were

paid for claiming after the early retirement age, and about 8 months later if

Raimond Maurer and Tatjana Schimetschek are at Department of Finance, Goethe University

Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, D-60323 Frankfurt, Germany.

Maurer can be contacted via e-mail: maurer@finance.uni-frankfurt.de. Schimetschek can be

contacted via e-mail: schimetschek@finance.uni-frankfurt.de. Olivia S. Mitchell is at The

Wharton School, University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH, Philadelphia, PA

19104. Mitchell can be contacted via e-mail: mitchelo@wharton.upenn.edu. Ralph Rogalla is at

School of Risk Management, Insurance, and Actuarial Science, St. John’s University, The Peter

Tobin College of Business, 101 Astor Place, New York, NY 10003. Rogalla can be contacted via e-

mail: rogallar@stjohns.edu. The research reported herein was performed pursuant to a grant

from the U.S. Social Security Administration (SSA) funded as part of the Michigan Retirement

Research Center. Additional research support was provided by the Deutsche Forschungsge-

meinschaft (DFG), the German Investment and Asset Management Association (BVI), the

Pension Research Council/Boettner Center at The Wharton School of the University of

Pennsylvania, and the Metzler Exchange Professor program. We also acknowledge support

from the Research Center SAFE, funded by the State of Hessen initiative for research excellence,

LOEWE. We are grateful for expert programming assistant from Yong Yu, and the RAND ALP

team including Alerk Amin, Tim Colvin, and Diana Malouf. We also benefited from comments

from participants at the 16th Annual Joint Meeting of the Retirement Research Consortium,

particularly John Cummings, Howard Iams, and Jeanne Young, participants at the 50th Annual

Meeting of the Western Risk and Insurance Association and the 2016 Annual Seminar of the

Risk Theory Society; Steve Goss who provided survival data; input provided at Wharton’s

AEW Workshop; and pilot tests conducted at the Wharton Behavioral Labs. We also thank two

anonymous referees for their valuable comments. Opinions and conclusions expressed herein

are solely those of the authors and do not represent the opinions or policy of SSA, any agency of

the Federal Government, or any other institution with which the authors are affiliated.

© 2016 The Journal of Risk and Insurance. Vol. 85, No. 4, 877–909 (2018).

DOI: 10.1111/jori.12173

877

the lump sum were paid only for those claiming after their full retirement

age. Overall, people will work one-third to one-half of the additional months.

Those who would currently claim at the youngest ages are most responsive

to the lump sum offer.

INTRODUCTION

Against the backdrop of global populationaging, policymakers around the world are

actively seeking ways to reform their nations’ old-age benefit systems, often by

encouraging delayed retirement. Many countries have done so by requiring raising

retirement ages and cutting benefit payouts, but this is often a politically fraught

process.

1

By contrast, the present articleexplores an alternative approach to encourage

delayed claiming: by offering people a lump sum if they claim later. That is, we

investigate whether exchanging the U.S. Social Security delayed retirement credit—

currentlypaid in form of an increased annuity benefit—for an actuariallyfair lump sum

payment would induce people to voluntarily delay claiming and work longer.

Under the Status Quo, an eligible individual can claim retirement benefits as early as

age 62 or as late as age 70. His monthly benefit paid for life depends on his earnings

history and his claiming age, with a reduction if he claims prior to his full retirement

age (FRA), and an increment for deferring claiming after that age. For someone born

in 1960 or later, for example, deferring the benefit from age 62 to his FRA of 67 would

entitle him to an increase in monthly benefits of around 43 percent (see Table 1

below).

2

In particular, delaying claiming to age 70 would imply a 77 percent increase

in lifetime monthly benefits.

Despite these substantial financial rewards for delayed retirement, a large share of

Americans—about 37 percent of retirees in 2014—still claims benefits around age 62

(Social Security Administration [SSA], 2015), Table 6.B5).

3

Suggestions for inducing

1

See Brown (2012) and Turner (2009) for a survey of pension retirement age and benefit

adjustments around the world, and Stevens (2016) for the effects of automatic FRA

adjustments linked to the development of general mortality.

2

When these rules were legislated, the Social Security delayed retirement credit was intended to

be actuarially fair. Hence the benefit increment was consistent with average mortality tables at

the time, as well as a 2.9 percent real assumed interest rate. In this article we assume the same

real interest rate. Current low interest rates imply that the delayed retirement credit is actually

better than fair for most people at present, thus embodying additional incentives to defer

retirement (see Shoven and Slavov, 2014). For additional information on the Status Quo benefit

formula, see http://www.ssa.gov/retirement/retirement.htm.

3

Several studies have examined retirement or claiming patterns under existing Social Security

rules (e.g., Coile et al., 2002; Gustman and Steinmeier, 2005, 2015; Shoven and Slavov, 2014;

Yin, 2015; Hubener, Maurer, and Mitchell, 2016). Brown et al. (2016) take a behavioral finance

perspective to examine whether people might be willing to give up some of their benefit

stream in exchange for a lump sum, but they do not link that question to continued labor force

participation as we do here. Chai et al. (2013) develop a theoretical model of rational

consumers who might delay claiming their retirement benefits if offered the chance to receive

the credits as a lump sum payment instead of an increase in lifetime annuity benefits.

However, that study does not undertake an empirical analysis, as we do here.

878 THE JOURNAL OF RISK AND INSURANCE

delayed retirement and extending the work life include increasing financial

incentives and changing benefit generosity (e.g., Laitner and Silverman, 2012; Kostøl

and Mogstad, 2014). Other proposals are based on insights from behavioral

economics, as it has been shown that retirement patterns are subject to behavioral

biases (see, e.g., Behaghel and Blau, 2012; Brown, Kapteyn, and Mitchell, 2016).

Moreover, some research has examined how providing prospective retirees with

additional information might enhance people’s understanding of Social Security

claiming rules (Mastrobuoni, 2011; Liebman and Luttmer, 2015).

When people claim benefits ear ly, they give up an attractive d eferred annuity, a

behavior reminiscent of the annuity puzzle. This puzzl e refers to the observatio n

that many individuals a re reluctant to voluntar ily exchange a lump sum for a

lifelong income strea m, despite the strong theoretical appeal of lo ngevity insurance

for most households (Yaa ri, 1965; Davidoff, Brow n, and Diamond, 2005). Re cent

empirical research supp orting the preference for non annuitized assets include s,

among others, Inkmann, L opes, and Michaelides ( 2011), who show using

data from the English Lon gitudinal Study of Agein g that only 5.9 percent of

retired households vo luntarily participated in the private annuity market. Warner

and Pleeter (2001) estima te personal discount rates using data from the separati on

benefit packages offere d to 65,000 U.S. militar y personnel, which inclu ded a choice

between a lifelong annuit y benefit and a lump sum payment . Despite the fact that

the implied breakeven disc ount rate for the lump sum was aro und 18 percent, the

majority of the enlisted pe rsonnel favored the lump sum p ayment over the lifelong

annuity benefit. (One reaso n may have been unwillingness to trust the govern-

ment’s lifetime payment promise.) Explanati ons for the low annuitiza tion includes

bequests (Bernheim, 19 91), behavioral factors l ike framing (Hu and Scott, 20 07;

Brown et al., 2008), market f rictions resulting from a symmetric information

(Mitchell et al., 1999), liquidity ne eds resulting from health cost shocks (Sinc lair and

Smetters, 2004; Turra and Mi tchell, 2008; Peijnenbur g, Nijman, and Werker, 2015 ),

and stochastic survival pro babilities (Reichling and Smetters, 2015).

TABLE 1

Delayed Claiming Boosts Monthly Social Security Benefits: Status Quo Scenario

Claiming Age

Monthly Benefit:

(% of PIA)

Boost With

1-Year Delay (%)

Cumulative Boost

Compared to Age 62 (%)

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

Notes: FRA, full retirement age: 67; PIA, primary insurance amount.

Source: www.ssa.gov.

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