Wharton professor Olivia Mitchell.

Governments around the world are attempting to extend the healthy life spans of their Social Security systems by encouraging workers to delay retirement, usually by raising the retirement age or by cutting benefits. In the U.S., the primary incentive to delay retirement and continue working comes from higher Social Security benefits paid to workers who don’t start claiming benefits until their full retirement age (FRA) and even higher benefits for those who don’t start claiming benefits until they reach age 70.

However, those incentives aren’t working. According to the Social Security Administration, 37% of those who first claimed Social Security benefits in 2014 were 62, the first age at which workers can claim benefits. Thirty-one percent wait until their FRA to start claiming, but only 2.6% of workers wait to start claiming until age 70 or older.

Enter an international research team, featuring Olivia Mitchell of the Wharton School, that decided to investigate whether a different approach to paying Social Security benefits would lead claimants to delay filing and work longer. The research showed that paying an “actuarially fair lump sum payment” to claimants rather than increased benefits over time would accomplish those two goals.

According to a paper published earlier this year on the research by Raimond Maurer, Ralph Rogalla and Tatjana Schimetschek (all from Goethe University of Frankfurt) and Mitchell, “people would voluntarily claim about six months later if the lump sum were paid for claiming after the early retirement age, and about eight months later if the lump sum were paid only for those claiming after their full retirement age.”

In addition, people would work longer by a statistically significant amount. Who would be most receptive to the lump sum offer? “Those who would currently claim at the youngest ages,” the research found.

Prior research cited in the Mitchell paper (notably a 2005 paper by Davidoff, Brown and Diamond, “Annuities and Individual Welfare,” in American Economic Review) found that people were “reluctant to exchange a lump sum for a lifelong income stream,” in what is known as the “annuity puzzle,” though the authors point out that additional prior theoretical research “showed that rational consumers would optimally delay claiming their retirement benefits if they were offered the chance to receive their delayed retirement credits as a lump sum payment, instead of an increase in lifetime annuity benefits.”

Other research (notably Peter Orszag in 2001, “Should a Lump-Sum Payment Replace Social Security Delayed Retirement Credit?” at the Center for Retirement Research at Boston College) looked at whether providing a lump sum would affect people’s claiming decisions, but did not include any insight into whether lump-sum recipients would work any longer.

Thus the more recent research, published under the auspices of the Wharton School and the Pension Research Council, Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum.

The researchers surveyed a representative sampling of 2,451 U.S. residents who were each presented with two scenarios and asked to declare when they would start claiming benefits, and how much longer they would work under each scenario.

Those surveyed were also asked to provide their earnings history and age, so before they considered the lump-sum question, they knew exactly what their actual “primary insurance amount,” or PIA, would be. The PIA is the monthly benefit amount for life (adjusted for inflation) that a worker would receive if he started to claim Social Security benefits at his full retirement age. The researchers used the Social Security Administration’s own benefits calculator to derive the PIA, and SSA’s actuarial adjustment factors to compute benefits for claiming ages that were earlier or later than each respondent’s FRA. 

The first scenario told each respondent to assume he would “receive lifelong monthly income in the amount of his age-62 Social Security benefit from his claiming date on, irrespective of when he actually claimed.” That benefit would be “paired with a lump sum payable as of his claiming date (i.e., the Lump Sum claiming age), where the amount is equal to the actuarial present value of his delayed retirement credit. Thus the lump sum is equal to the increase in lifetime retirement benefits generated by claiming after the age of 62.”

In the other scenario, the respondent is told “his monthly benefit would be adjusted upward for delayed claiming, until his FRA” as under current Social Security rules. For claiming ages later than each worker’s FRA, “his monthly benefit would be fixed at the FRA level, and he would receive a lump sum payable as of his claiming date (i.e., the Delayed Lump Sum claiming age) equal to the present value of the delayed retirement credit after the full retirement age.”

In a footnote, the authors point out this scenario is not the same as the “file and suspend” strategy that had been available to Social Security recipients up until the most recent budget bill was signed into law, which will end that strategy in mid-2016.

Summarizing the results, the authors say that those surveyed would voluntarily work longer “if they were offered an actuarially fair lump sum instead of a delayed retirement annuity under Social Security. These delays in claiming are reasonably large, of about half a year on average if the lump sum is paid on claiming after age 62, and about two-thirds of a year if the lump sum is paid only for those claiming after their full retirement age.”

And what is the amount of the lump sum? It’s calculated, the authors report, as the “actuarial present value at the claiming age of the increased lifelong monthly retirement benefits,” based on current Social Security rules, “at a worker’s full retirement age relative to” the lower benefits by claiming at age 62. In addition, they say “annuity factors are derived using the mortality probabilities” as found in the 2013 Social Security Trustees Report. 

Moreover, those who are most responsive to lump-sum incentives turn out to be those who would have claimed early under current Social Security rules. “We also find that people would voluntarily work about one-third of the delay in claiming time in the Lump Sum scenario, whereas they would work almost half of the additional time in the Delayed Lump Sum scenario,” the authors reported.

“Overall,” the authors conclude, “offering people lump sums in lieu of higher annuity payments from Social Security would induce reasonably substantial delays in claiming ages, by about half a year on average if the lump sum were paid on claiming, and by about two-thirds of a year if the lump sum were only payable for benefits claimed after the full retirement age.”

In addition to the lump sum approach being most appealing to those who would have claimed benefits early, the researchers found that delays in “claiming patterns do not differ by wealth levels, the presence of other annuities, Social Security benefit amounts, planning horizons, or expected investment returns.” Even those less financially literate and those with the most debt would delay claiming.

The authors point out that their research was designed to be cost-neutral to the U.S. Social Security system and in researchers’ trademark understated way, express the hope that the research will “interest policymakers seeking ways of reforming Social Security without raising costs or cutting benefits, while enhancing the incentives to delay retirement.”

In addition, they say the finding that workers “would voluntarily extend their work effort due to the lump sum options” implies that some workers “would pay Social Security payroll taxes for more years, enhancing system solvency.”

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