Behavioral Insights About Social Security

May 7, 2019 / Amanda Chase, Horsesmouth Assistant Editor

Say the word “annuity” and many people turn up their noses, yet are anxious to take their Social Security benefits as soon as they can. What can help more people embrace something that guarantees lifetime income and delay taking Social Security so they can have greater income in retirement?

According to Suzanne Shu, associate professor of marketing at the UCLA Anderson School of Management, although single-life annuities remove the risk of people outliving their savings, those who don’t favor annuities are risk-averse. The risk they fear is dying before they get paid all their benefits. But, Shu said these folks are thinking of the way variable annuities work, not fixed annuities.

Shu discussed a research study that offered subjects a choice of three annuity options for which they could invest $100,000 at age 65. Recognizing individuals’ fear of dying before obtaining all annuity payments, all options were period-certain annuities. 36% chose “if these were my only options, I would defer my choice and continue to self-manage my retirement assets.” 20% chose an option with a set dollar amount annual increase in payments, and the biggest share of subjects (44%) chose an annuity option with the least period certain years and a 5% annual increase in payments rather than a 7% annual increase.

When study participants were given enhanced information—such as how much total the annuity will pay out over time and a table of payment amounts at different ages—to show the compounding of the percentage annual increase, more people chose annuities and many who first chose a dollar amount annual increase moved to the 5% annual increase. Still, 24% chose no annuity.

Shu said that the majority of people declare Social Security at age 62, the earliest age at which they can take it. Many think they are taking their money “back from the government,” while others have the same risk aversion as with annuities. They don’t want to pass away before they get all their money. Shu’s research has found that convincing people to claim Social Security at a later age is difficult, but there are some measures that have worked. For example, communicating to people that delaying the age they declare is a good idea for their financial well-being, telling people to consider the implications of living longer in retirement, and letting them know about how many people regret claiming early all had significant impacts on individuals’ claiming age decisions.

Find the full article and more about the research study at Plan Sponsor.


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