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.”