Accounting for Social Security Claiming

Sep 25, 2018 / Amanda Chase, Horsesmouth Assistant Editor

A new paper from the Center for Retirement Research at Boston College 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) the individuals’ subjective discount rate, and (ii) the discount rate implied 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.

Given that many people consider themselves sufficiently annuitized even when they claim at age 62, late claimers should be awarded not with higher pension income but with lump-sum payments. The researchers show that the policy of providing lump-sum payments instead of increasing Social Security benefits is very effective in inducing individuals to delay claiming.

You can find the full paper here.


This material is provided exclusively for use by individuals with an active license to the Savvy Social Security Planning Program. Use of this material is subject to the Social Security Planning Program Agreement and applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties express or implied are hereby excluded.

© 2019 Horsesmouth, LLC. All Rights Reserved.