From Accounting For Social Security Claiming Behavior by
Svetlana Pashchenko and
Ponpoje Porapakkarm, a paper published by the Center for Retirement Research at Boston College:
The paper examines why most individuals claim Social Security benefits before the full retirement age. Early claiming results in a substantial reduction in pension income, yet many people claim as early as possible, age 62, or soon thereafter. Since delaying claiming is equivalent to purchasing additional annuity income, this behavior is consistent with the so-called annuity puzzle....
The paper found that:
- One of the important factors accounting for the low demand for public annuities is a significant discrepancy between : (i) th e individuals’ subjective discount rate, and (ii) the discount rate im plied by the implicit price of the Social Security annuity.
- Two of the commonly named impediments to private annuitization – mean -tested benefits and medical expenditures – are not important drivers of individuals’ decisions for when to claim Social Security benefits.Pre-annuitized wealth and bequest motives play a major role in the decisions to collect Social Security benefits. Our counterfactual experiments show that if the amount of basic Social Security benefits is scaled down or if the strength of the bequest motive is diminished, significantly more people will postpone claiming.
The policy implications of the findings are:
- Given that many people consider themselves sufficiently annuitized even when they claim at age 62, late claimer s should be awarded not with higher pension income but with lump -sum payments.
- We show that the policy of providing lump-sum payments instead of increasing Social Security benefits is very effective in inducing individuals to delay claiming.
It should be noted that this is an entirely theoretical work. No new real life data was collected.
You've got two economists who are disturbed by the fact that real people don't behave like the billiard balls that their theories suppose them to be so they try to come up with new theories that square with reality. That's perfectly appropriate as a matter of economics and it's an approach that may pay dividends but it's not proof of anything. Maybe lump sum payments would work. Maybe they wouldn't work.
I think the economists need to consider two possibilities more closely. One is that as people get older, on average, their health declines making it harder for them to work. The other is that as people get older, they become more interested in enjoying the benefits of retirement. People don't look at things in the same way when they're 62 that they did when they were 32. People aren't billiard balls. Maybe, we should let them make the decisions they want to make without prodding them to make decisions that other, younger people (as these economists almost certainly are) think they ought to make.
You've got two economists who are disturbed by the fact that real people don't behave like the billiard balls that their theories suppose them to be so they try to come up with new theories that square with reality. That's perfectly appropriate as a matter of economics and it's an approach that may pay dividends but it's not proof of anything. Maybe lump sum payments would work. Maybe they wouldn't work.
I think the economists need to consider two possibilities more closely. One is that as people get older, on average, their health declines making it harder for them to work. The other is that as people get older, they become more interested in enjoying the benefits of retirement. People don't look at things in the same way when they're 62 that they did when they were 32. People aren't billiard balls. Maybe, we should let them make the decisions they want to make without prodding them to make decisions that other, younger people (as these economists almost certainly are) think they ought to make.
8 comments:
I don't even understand why they want to induce people to defer claiming benefits. Claiming is actuarially neutral--on a population level, you get the same lifetime amount no matter when you claim.
Not everyone wants to work until they die. Not everyone wants to risk dying before they claim. If everyone works til they're 70 there are fewer opportunities for younger people to enter the job market or get promoted. And plenty of jobs are so demanding that it's not practical to do them til age 70 anyway.
I'm an attorney, so, a sedentary job. I never thought I'd be ready to leave the practice of law, but at 63, with stressors of work and some creeping physical ailments, I'm counting my days. Not quite yet, but I'm not so sure I want to make 70, either. And yes, Social Security will be my primary income.
Health is probably the biggest factor, along with wealth. Healthy and wealthy: delaying makes sense. Poor with poor health: get it while you can. This isn't rocket science.
If we spent half as much time regulating Wall Street and the big banks and eliminating the tax cuts for the super wealthy we would be miles ahead. The giant problem coming in the not that distant future will be the next economic crash and the political limitations that will come with it this time. Wild west banking and trading will bring us down not Joe Sixpack trying to retire a couple of years before he dies.
I plan to wait until age 70 to receive Social Security, although I will retire earlier than that (probably 65, which isn't that far off). The reason I want to wait is precisely because I want the higher "annuity" - I wouldn't at all be interested in a lump sum. I think there are also tax advantages to waiting. If you have taxable income while on Social Security, then it's quite possible some of your Social Security will be taxable. In effect, this makes your marginal tax rates 50% or 85% higher (since each extra dollar of taxable income makes 50 or 85 cents of Social Security taxable, up to a limit).
To avoid this, I'm going to try to pay no taxes after I start Social Security, which means I'll have to limit my taxable (non-Social Security) income to less than $1000/month. So I'll buy an annuity for a little less than that, and then receive my other taxable savings after I retire but before I start Social Security.
The possibility that I might die before receiving any Social Security isn't a factor - if I do, I won't need the money. My main consideration is not wanting to run out of money if I live a very long time. Fortunately, I think I have enough savings to do this - I certainly realize that many people do not have this option.
@ 6:41
How would any of these options affect Social Security?
Anonymous Anonymous said...
If we spent half as much time regulating Wall Street and the big banks and eliminating the tax cuts for the super wealthy we would be miles ahead.
Social Security doesn't receive funding from any of these "problems". In fact, if any of the policies leads to more hiring and/or hiring wages, then Social Security gets MORE funding. Quit trying to lump supposed Republican platform ideas into every perceived problem with Social Security.
I always find this kind of argument just silly. If you make the reward for delaying claiming into a lump sum, then sure, maybe more people will delay, but at the same time you've removed the entire reason that it's objectively beneficial to get people to delay - which is because it increases their guaranteed monthly benefit for later in life!
Social Security was never, ever, under any circumstances, designed or intended to be the sole source of retirement income. Somehow, we have a generation of retirees that believe they are entitled to live the same lifestyle as when they were working but did not plan for the future or save for it.
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