When to claim Social Security benefits is a key financial decision for millions of household. These retirement benefits are currently provided as a lifelong benefit stream, though some workers might be willing to trade a portion of their annuity streams in exchange for a lump sum amount. In a recent theoretical paper, we explore whether allowing people to receive an actuarially fair lump sum as a payment for delayed retirement rather than as an addition to their lifetime Social Security benefits could induce them to work longer on a voluntary basis (see Chai/Maurer/Mitchell/Rogalla 2013). We model the factors that influence how people would trade off a benefit stream for a lump sum and examine the consequences of such tradeoffs for work, retirement, and life-cycle wellbeing. The findings suggest that, given the chance to receive a delayed retirement credit as a lump sum payment, workers would delay retirement ages by 1-2 years, with little or no decline in welfare. Results are similar for households with or without bequest motives. Thus from a theoretical vantage point, providing a lump sum does not simply result in wealth transfers to the next generation, consistent with the rationale for Social Security as a national social insurance scheme intended to support consumption for the elderly.
Despite this and other theoretical rationales for delaying claiming, most Americans and also European Households in fact claim benefits – and stop working – very young, around age 62. One reason for this is that people tend to emphasize a “breakeven” approach to claiming – they claim early so as to avoid potentially “forfeiting” future higher cash flows if they die too soon. Nevertheless, under the current rules, it is roughly actuarially neutral to delay claiming by working longer. On the other hand, if the increment to future benefits were payable as a lump sum instead of a benefit stream, this could possibly provide an incentive for individuals to defer claiming and work longer. Moreover, recent evidence indicates that working longer may well be associated with better mental and physical health. Additionally, from a macroeconomic perspective, longer work lives also offer additional economic resources to help cover the costs of population aging. Our findings will interest policymakers seeking to reform the Social Security system without raising costs or cutting benefits, while enhancing the incentives to delay retirement.
Our goal is to examine theoretically (using a lifecycle consumption and portfolio choice model) and empirically (using data on HRS) whether people might be willing to delay claiming Social Security benefits in exchange for different compensation options. Within the lifecycle model framework we investigate the factors that influence how people trade off a Social Security stream for a lump sum, and we also examine the consequences of such tradeoffs for work, retirement, and life-cycle wellbeing. An important factor would be to model health risk and family dynamics. With the empirical setting we will devise an experimental module (using HRS) which allows to explore preferences (discounting, leisure, risk aversion) and exogenous factor (interest rate, health, wealth profile) by studying if they would be willing to receive their delayed retirement credit as a lifelong benefit versus a lump sum.
After hiring the research assistance 02/2014, we studied in detail the rules for benefit claiming according to the US Social Security System. Based on that programmed these rules to analyze the increase in benefits by delaying. In addition, we contacted the chief actuary of the US Social Security Administration to get mortality rates they use. Based on that, we constructed a unisex table and calculated the corresponding lump-sum payments for different claiming ages. Next start to include the lump-sum options (instead of increased annuity payments) into a dynamic portfolio choice model. This requires an additional (discrete) state variable. In addition, we work on including habit preferences in the LC-model, which seems to be helpful in explaining annuitization decision.
We conduct (together with RAND and the Pension Research Council) a field experiment on the willingness of households to delay claiming. This results in Working Paper, Presentation, and Press reports.
|Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek||Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum|
Journal of Risk and Insurance
|2018||Household Finance||Annuity, lump sum, Social Security, delayed retirement, lifetime income, pension|
Olivia S. Mitchell,
|The Potential Effect of Offering Lump Sums as Retirement Payments|
Policy Letter No. 50