Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-25T17:09:57.997Z Has data issue: false hasContentIssue false
  • English
  • Français

Does it pay to delay social security?*

Published online by Cambridge University Press:  22 October 2013

JOHN B. SHOVEN  and
SITA NATARAJ SLAVOV
JOHN B. SHOVEN
Affiliation:
Stanford University and National Bureau of Economic Research (e-mail: [email protected])
SITA NATARAJ SLAVOV
Affiliation:
American Enterprise Institute (e-mail: [email protected])
Get access Rights & Permissions [Opens in a new window]

Abstract

Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. We investigate the actuarial fairness of that adjustment in light of recent improvements in mortality and historically low interest rates. We show that delaying is actuarially advantageous for a large number of people, even for individuals with mortality rates that are twice the average. At real interest rates closer to their historical average, singles with mortality that is substantially greater than average do not benefit from delay, although primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy. Finally, we quantify the extent to which the gains from delay can be expected to increase in the future as a result of mortality improvements.

Keywords

Social Securityactuarial fairnessannuities
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 13 , Issue 2 , April 2014 , pp. 121 - 144
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

This research was supported by the U.S. Social Security Administration through grant number 5RRC08098400-04-00 to the National Bureau of Economic Research (NBER) as part of the SSA Retirement Research Consortium, and by the Sloan Foundation through grant number 2011-10-18 to Stanford University. The findings and conclusions expressed are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government, the Sloan Foundation, or the NBER. The authors are grateful to Phoebe Yu for outstanding research assistance; to Jim Poterba, Jason Scott, David Weaver, participants at the 14th Annual Retirement Research Consortium Conference, and two anonymous referees for helpful discussion and comments; and to Steve Goss, Michael Morris, and Alice Wade of the Social Security Administration for providing the cohort life tables used in this paper. The first author is a member of the board of directors of Financial Engines, a NASDAQ-listed company which assists individuals with retirement planning. Financial Engines provided no financial support for this research. The authors are doing related research that is also supported by a Social Security Administration grant to the NBER as part of the SSA Retirement Research Consortium. The views and approaches in this paper are solely those of the authors. This paper is based on two earlier working papers: ‘The Decision to Delay Social Security: Theory and Evidence’ (NBER Working Paper no. 17866) and ‘When Does it Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules’ (NBER Working Paper no. 18210).

References

Arias, Elizabeth, Rostron, Brian L., and Tejada-Vera, Betzaida (2010) United States Life Tables, 2005. National Vital Statistics Reports, 58(10).Google ScholarPubMed
Ball, Robert M. (1972) Social security amendments of 1972: summary and legislative history. Social Security Bulletin, 36(3): 3–25.Google Scholar
Beauchamp, Andrew and Wagner, Mathis (2012) Dying to Retire: Adverse Selection and Welfare in Social Security. Unpublished manuscript.Google Scholar
Blahous, Charles (2010) Social Security: The Unfinished Work. Stanford: Hoover Institution Press.Google Scholar
Brown, Jeffrey R., Liebman, Jeffrey B., and Pollet, Joshua (2002) Estimating Life Tables that reflect socioeconomic differences in mortality. In Feldstein, Martin and Liebman, Jeffrey B. (eds), The Distributional Aspects of Social Security and Social Security Reform. Chicago: University of Chicago Press.Google Scholar
Brown, Jeffrey R. (2007) Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning. Working Paper 13537. Cambridge: National Bureau of Economic Research.Google Scholar
Brown, Jeffrey R., Casey, Marcus D., and Mitchell, Olivia S. (2007) Who Values the Social Security Annuity? New Evidence on the Annuity Puzzle. Working Paper NB07-02. Cambridge: National Bureau of Economic Research.Google Scholar
Brown, Jeffrey R. (2008) Financial Education and Annuities. Consultant Report. Paris: OECD.Google Scholar
Brown, Jeffrey, Arie Kapteyn, R., and Mitchell, Olivia (2011) Framing effects and expected social security claiming behavior.Working Paper 17018. Cambridge: National Bureau of Economic Research.Google Scholar
Butler, Monika and Teppa, Federica (2007) The Choice Between an Annuity and a Lump Sum: Results from Swiss Pension Funds. Journal of Public Economics, 91(10): 1944–1966.Google Scholar
Chai, Jingjing, Maurer, Raimond, Mitchell, Olivia S., and Rogalla, Ralph (2013) Exchanging delayed social security benefits for lump sums: could this incentivize longer working careers? Working Paper 19032. Cambridge: National Bureau of Economic Research.Google Scholar
Cohen, Wilbur J. and Mitchell, Willam L. (1961) Social security amendments of 1961: summary and legislative history. Social Security Bulletin, 24(9): 3–33.Google Scholar
Coile, Courtney, Diamond, Peter, Gruber, Jonathan and Jousten, Alain (2002) Delays in claiming social security benefits. Journal of Public Economics, 84(3): 357–385.Google Scholar
Hurd, Michael D., Smith, James P. and Zissimopoulos, Julie M. (2004) The effects of subjective survival on retirement and social security claiming. Journal of Applied Econometrics, 19(6): 761–775.CrossRefGoogle Scholar
Jivan, Natalia A (2004) How Can the Actuarial Reduction for Social Security Be Right? Just the Facts 11, Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Kotlikoff, Laurence (2012) 42 Social Security ‘Secrets’ All Baby Boomers and Millions of Current Recipients Need to Know – Revised! Forbes July 3. Available online at http://www.forbes.com/sites/kotlikoff/2012/07/03/42-social-security-secrets-all-baby-boomers-and-millions-of-current-recipients-need-to-know/.Google Scholar
Liebman, Jeffrey B. and Luttmer, Erzo F.P. (2011) Would People Behave Differently If They Better Understood Social Security? Evidence From a Field Experiment. Unpublished Manuscript.Google Scholar
Mahaney, James I. and Carlson, Peter C. (2007) Rethinking social security claiming in a 401(k) world. Working Paper 2007–18. Philadelphia: Pension Research Council.Google Scholar
Meyer, William and Reichenstein, William (2010) Social security: when to start benefits and how to minimize longevity risk. Journal of Financial Planning, 23(3): 49–59.Google Scholar
Mitchell, Olivia S., Poterba, James M., Warshawsky, Mark J., and Brown, Jeffrey R. (1999) New Evidence on the Money's Worth of Individual Annuities. The American Economic Review, 89(5): 1299–1318.CrossRefGoogle Scholar
Munnell, Alicia H. and Soto, Mauricio (2005) Why Do Women Claim Social Security Benefits So Early? Issue Brief 35 Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Munnell, Alicia H., Golub-Sass, Alex and Karamcheva, Nadia, (2009) Strange but True: Claim Social Security Now, Claim More Later. Issue Brief 9–9, Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Munnell, Alicia H. and Sass, Steven A. (2012) Can the Actuarial Reduction for Social Security Early Retirement Still be Right? Issue Brief 12–6, Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Orszag, Peter (2001) Should a Lump-Sum Payment Replace Social Security's Delayed Retirement Credit? Issue in Brief 6, Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Sass, Steven A., Sun, Wei, and Webb, Anthony (2007) Why do men claim social security so early: ignorance or caddishness? Working Paper 2007–17, Center for Retirement Research. Chestnut Hill: Boston College.Google Scholar
Sass, Steven A., Sun, Wei, and Webb, Anthony (2013) Social security claiming decision of married men and widow poverty. Economics Letters, 119(1): 20–23.CrossRefGoogle Scholar
Schottland, Charles I (1956) Social security amendments of 1956: a summary and legislative history. Social Security Bulletin, 19(9): 3–31.Google Scholar
Society of Actuaries (2000) The RP-2000 Mortality Tables. Available online at http://www.soa.org/research/experience-study/pension/research-rp-2000-mortality-tables.aspx.Google Scholar
Sun, Wei and Webb, Anthony (2009) How much do households really lose by claiming social security at age 62? Unpublished Manuscript.Google Scholar
Shuart, Amy N., Weaver, David A., and Whitman, Kevin (2010) Widowed before retirement: social security benefits claiming strategies. Journal of Financial Planning, 23(4): 45–53.Google Scholar
Weaver, David A. (2002) The widow(er)'s limit provision of social security. Social Security Bulletin, 64(1): 1–15.Google Scholar
Yaari, Menahem E. (1965) Uncertain Lifetime, Life Insurance, and the Theory of the Consumer. The Review of Economic Studies, 32(2): 137–150.Google Scholar