‘Modeling Income in the Near Term’ shows varied socio-economic outcomesReprinted with permission from the U.S. Social Security Administration. Read the full report, complete with graphs and footnotes here.
Among Social Security retired-worker beneficiaries, nearly half claim their retirement benefits as early as possible, and almost all of them claim at some point before their full retirement age (FRA) (Muldoon and Kopcke 2008; Song and Manchester 2007a).
Because Americans are living longer but retiring earlier (Burtless and Quinn 2002; Wise 1997), often with a lack of personal retirement savings, the timing of benefit claiming can be crucial to financial well-being in retirement. Because claiming benefits before the FRA results in permanently reduced benefits, many researchers argue that delaying claiming is often the best decision economically (Coile and others 2002; Shoven and Slavov 2013). In fact, delaying the claiming of Social Security retirement benefits is now recognized as an important way to enhance retirement security (see, for example, Munnell and Sass (2008)).
Following the notion that delaying benefit claiming can aid in the financial security of older Americans, the National Commission on Fiscal Responsibility and Reform (2010)—also known as the Simpson-Bowles Commission—urged the Social Security Administration (SSA) to provide information to the public “with an eye toward encouraging delayed retirement” and to do so by considering “behavioral economics approaches.” In this article, we explore a number of behavioral strategies aimed at incentivizing individuals to delay claiming.
SSA’s current structure to incentivize delayed retirement benefit claiming involves decreasing monthly benefits if they are claimed before the FRA and increasing monthly benefits if they are claimed after the FRA; however, the size of the annual increases in benefits after the FRA is larger than the size of the annual decreases in the months before the FRA. That incentive structure results in a number of interesting distributional outcomes and presents an opportunity to introduce policy changes that may affect those outcomes.
In keeping with the finding that most individuals claim their benefits before their FRA (with many claiming as early as possible), making the incentives to delay claiming in the months before the FRA more attractive could affect a far greater portion of the retirement-age population than do current incentives. As such, the ideas presented in this study aim to shift that reward structure so that individuals are more incentivized to delay claiming in the months and years before reaching their FRA. While delaying claiming benefits typically refers to claiming them sometime after the FRA, we highlight ways to encourage individuals to delay claiming beyond when they would have chosen to claim otherwise, which, for most individuals, is sometime before the FRA. Of course, those incentives would be the most effective for individuals whose claiming decision is not affected by other factors, such as poor health or job loss, which can force people to retire earlier than they would have otherwise.
In this article, we first describe the design of the current benefit-claiming incentive structure. Next, we present the historical context that led to this existing structure. We then provide data on the number and characteristics of people who claim benefits at various ages. Using that data, we describe the potential usefulness of better targeting the claiming-related incentives to persons who start receiving benefits before their FRA. Next, we present a number of novel ideas, based on psychological and behavioral research, intended to incentivize workers to delay claiming in the years before their FRA. Finally, we use Modeling Income in the Near Term, Version 6 (MINT6) projections to examine how potential behavioral responses to one of these ideas could affect the retirement outcomes of various groups.
Under current law, retirees can receive their full, unreduced monthly benefit upon reaching their FRA. For individuals born after 1942, the current FRA varies from age 66 to 67, based on year of birth.1 The earliest age at which individuals can start receiving retirement benefits is 62, also called the early eligibility age (EEA). For each month that benefits are received before the FRA, those benefits are permanently reduced by early retirement reduction factors. For benefits started in the 3 years (36 months) before the FRA, the monthly reduction is 0.555 percent, or 6.7 percent a year (Table 1). For benefits started more than 3 years before the FRA, the monthly reduction is 0.416 percent, or about 5 percent a year. For example, assume an individual has an FRA of 66 and an unreduced monthly benefit of $1,000. If that person starts receiving benefits 4 years (48 months) early at the EEA, his or her monthly benefit would be reduced by about 20 percent for the first 3 years (combined) and an additional 5 percent for the fourth year, for a total reduction of about 25 percent, reducing the monthly benefit by $250 to $750.
If, however, an individual waits until after reaching his or her FRA to claim benefits, the monthly benefit increases with delayed retirement credits (DRCs). DRCs can be earned each month up to age 70 and can increase benefits by about 0.667 percent a month, or 8 percent a year (Table 2).2 If the same person described in our example waited 4 years (48 months) to claim benefits at age 70, his or her monthly benefit would increase by about 32 percent, or $320, for a monthly benefit of $1,320. The total increase in benefits for persons claiming at age 70 (32 percent) is larger than the total reduction for those retiring at 62 (25 percent) with a FRA of 66. Once the FRA reaches 67, the total increase from DRCs (24 percent) will be smaller than the total reduction before that FRA (30 percent); however, the dollar increase in monthly benefits for delaying benefit claiming by 1 year will still be larger for individuals after reaching the FRA than before reaching it. For example, the same individual described earlier with an FRA of 66 and an unreduced benefit of $1,000 a month would get $50 more in monthly benefits if he or she delayed claiming from age 62 to 63, compared with $80 more a month if that worker delayed claiming from age 66 to 67.
Because the early retirement reduction factors (which reduce benefits for claiming early) and DRCs (which increase benefits for claiming later) are roughly actuarially fair, lifetime benefits are about the same for the average beneficiary regardless of claiming age.3 For individuals who retire early, monthly benefits are reduced to take into account the longer period of time they are received. For individuals who retire later, the higher monthly benefit takes into account the shorter period of time they are received.
Auxiliary benefits, including both spousal and survivor benefits, are also reduced if they are claimed early, but different rules apply. At the FRA, a spouse is eligible to receive 50 percent of a retired-worker’s benefit. Spousal retirement benefits can start at age 62 and are reduced for each month they are claimed before the FRA by slightly different reduction factors than those described earlier.4 However, spousal benefits do not increase if the retired worker earns DRCs.5
In comparison, the earliest age that survivor retirement benefits can start is age 60.6 Survivor benefits that start at age 60 are always reduced by the maximum reduction of 28.5 percent. (For example, a $1,000 monthly survivor benefit at the FRA would be reduced to $715 if benefits began at age 60.) The retired-worker’s benefit claiming decision affects that of his or her surviving spouse: Survivors can receive no more than the retired worker would have received if that worker started receiving benefits before reaching his or her FRA, and survivors can also inherit DRCs if the retired worker claimed benefits after reaching his or her FRA.7
The original Social Security Act of 1935 set the age at which retirement benefits could be received at 65. The 1948 Social Security Advisory Council recommended lowering the age at which women could receive benefits to 60. The justification for doing so was that the husband’s retirement benefits were inadequate to “maintain the family.” Surveys at the time showed that families in which the wife was also entitled to benefits had a substantially higher standard of living. Because the majority of married men who reached age 65 had younger wives, lowering the age at which women could receive benefits would permit the younger, female spouse to claim benefits when the husband claimed benefits (Advisory Council Report on Social Security 1948). The 1956 Amendments to the Social Security Act did just that, by allowing female workers and wives to start receiving benefits at age 62 (instead of age 60, as recommended), but at a reduced level to take into account the longer period over which they would receive benefits.8 The 1961 Amendments lowered the age at which male retirees could receive reduced benefits to age 62 as one possible solution to the economic problem of unemployed older workers (Cohen and Mitchell 1961).9 The 1965 Amendments allowed widows to receive reduced benefits as early as age 60, and widowers were added in the 1972 Amendments.
The 1972 Amendments also instituted DRCs, which originally increased benefits by one-twelfth of 1 percent for each month between ages 65 and 72 in which an individual did not claim benefits (Ball 1973). DRCs were added to the law as a partial offset to the retirement earnings test (RET), which applies when individuals claim benefits before the FRA but continue to work. Specifically, beneficiaries who are younger than their FRA and have earnings over a certain threshold have their benefits either partially or fully offset by the RET (discussed in more detail later in the article).10 In 1972, some observers argued that if program participants continued to work after age 65 and did not claim benefits (because they did not want to be subject to the RET), it was only fair that they receive some additional compensation for their extra work (DeWitt 2000). DRCs were increased to 3 percent a year with the 1977 Amendments for persons reaching age 62 after 1978. The 1983 Amendments gradually increased DRCs to 8 percent a year beginning in 1990, while also incrementally increasing the FRA from age 65 to age 66 by 2009 and to age 67 by 2027. The age up to which DRCs could be earned was lowered from 72 to 70 starting in 1984 to correspond with the age at which the RET no longer applied (SSA n.d.). The 2000 Amendments eliminated the RET for beneficiaries once they reached their FRA.11
Because of the legislative changes that have been implemented over time, the age at which people start to claim benefits has shifted. Prior to the 1956 Amendments, the majority of women claimed benefits after their FRA (Chart 1). Once the law changed and allowed women to claim benefits (albeit reduced) before their FRA, the percentage of women who claimed benefits after their FRA dropped dramatically, from 78 percent in 1950 to 33 percent in 1960. By 2010, only 6 percent of women waited until after the FRA to claim benefits. However, the percentage of women claiming benefits at age 62 doubled from just over 25 percent in 1960 to over 50 percent in 2010.
As described above, shifts in claiming behavior over time seem to follow legislative changes, suggesting that individuals may be responding to nonhealth- or nonwealth-related external cues in deciding when to claim benefits. Taken together, these findings may suggest that new incentives, such as those proposed later, could influence an individual’s benefit claiming behavior.
Current Trends in Social Security Benefit Claiming Behavior
Most people claim benefits before their FRA, with many claiming as early as possible. Of the nondisabled persons who claimed benefits in 2012, around 40 percent of both men and women claimed benefits at the EEA, with most of the remaining portions claiming them by their FRA (Chart 3). On the other hand, just over 3 percent of men and women waited until after their FRA to claim benefits in that year.
In order to identify the characteristics of individuals claiming at various ages, we use SSA’s MINT6 data13 to examine nondisabled beneficiaries in 2014 who started receiving benefits at age 62, at their FRA, and after their FRA (that is, ages 67 to 70).14 We find that individuals who claimed benefits at age 62 had lower levels of education than those who claimed at their FRA or later. As Chart 4 shows, 45 percent of individuals who claimed benefits at age 62 had only a high school diploma compared with 35 percent in the older claiming-age groups. In addition, about 40 percent of individuals who claimed at their FRA or later had either a bachelor’s or graduate degree, compared with less than a quarter of those who claimed at age 62.
Beneficiaries who claimed at their FRA or later were also much more likely to have had high individual non-Social Security income (Chart 5). Almost 60 percent of beneficiaries in those claiming-age groups had individual income in the two highest quintiles. Because those individuals had other sources of income outside of Social Security (including earnings, defined benefit pension income, and asset income)15 to help them maintain their standard of living, it makes sense that they would have claimed benefits later. For individuals who claimed at age 62, about 40 percent had individual income in the two highest quintiles. That proportion represents high individual-income persons who could have possibly afforded to wait past age 62 to claim Social Security benefits, but claimed at age 62 anyway.
The health status16 of workers often plays a role in when they decide to claim retirement benefits. As Chart 6 shows, between approximately a quarter and a third of beneficiaries said they were in fair or poor health at each of the claiming ages. Individuals may decide to claim benefits once they are no longer in good health, which could occur at any age between 62 and 70. However, just over 70 percent of beneficiaries who claimed benefits at age 62 reported that they were in good, very good, or excellent health, perhaps indicating that their health status was not the main motivation for claiming benefits as early as possible. Tied to health status is the degree to which individuals feel that their health limits their ability to work. For nondisabled beneficiaries who claimed benefits at age 62, about 94 percent said they had no health-related limitations on their work, while very few nondisabled beneficiaries who claimed at their FRA had any limits (Chart 7). This implies that many employed workers are healthy enough to continue working in lieu of claiming benefits at the EEA.
As expected, individuals who claim benefits earlier receive them for a longer period. Claimants at age 62 will receive benefits for almost 25 years, compared with about 20 years for those who claim after their FRA (Table 3). However, the average death age17 for beneficiaries who claim benefits at age 62 is only 1 year lower than it is for those who claim at their FRA or later. This means that, on average, those beneficiaries who chose to have permanently reduced benefits will still need those benefits at fairly old ages, when health costs may be at their highest and personal savings may be depleted. As the table shows, beneficiaries who claimed benefits at age 62 will receive about $500 less per month, on average, than those who waited until at least their FRA to claim. The difference is larger when compared with individuals who wait until after their FRA to claim, as those beneficiaries receive DRCs for each month they delay claiming past their FRA.
In sum, beneficiaries who claimed benefits at age 62 had lower levels of education and income than those who waited until at least their FRA to claim. However, the proportion of nondisabled beneficiaries who reported being in fair or poor health, or having health-related limitations, was only slightly higher for those who claimed benefits at age 62 than for those who claimed later. Individuals who started receiving benefits at younger ages will receive smaller monthly amounts for a longer period than those who claimed later. Although many people have reasons for retiring early, such as becoming disabled, facing a work limitation, being laid off with few job prospects, or having to care for a disabled spouse or other family member (Helman and others 2014), there may be some individuals who claim benefits at age 62 who could claim them later. For example, early claimers who have higher education levels may have greater job prospects that could allow them to work longer. In addition, many early claimers are in good or excellent health, which may also enable them to continue working. In fact, there has been a long-term rise in labor force participation rates among individuals aged 55 or older since the 1990s (Sok 2010).18 Lastly, the average death age is comparable in all three claiming-age groups, which means that individuals who claim early will need their benefits to last for about as long as those who claim later.
Incentives to Delay Benefit Claiming
The current structure for incentivizing delayed claiming of retirement benefits provides larger annual incentives for delaying claiming after the FRA than it does for delaying claiming before the FRA. Although the current incentive structure provides for actuarial fairness in average lifetime benefits, it is possible that a different structure could more adequately serve the needs of beneficiaries across the income distribution in terms of monthly benefit amounts. The primary reason for encouraging delayed claiming is so that retirees have more monthly income in their later years, when personal savings, if any, are more likely to be depleted and health costs are likely to be at their highest. In essence, then, the argument to delay claiming is one of increasing monthly benefits as much as possible, not necessarily maximizing lifetime benefits. From this perspective, policymakers may prefer to sacrifice some actuarial fairness in lifetime benefits in exchange for enhancing income adequacy for older Americans.
In this section, we present ideas for changing the current incentive structure to encourage delayed claiming in the years before the FRA, based on previous psychological and behavioral research. As previously noted, we are considering delayed claiming to mean that an individual claims benefits later than he or she would have chosen to claim otherwise. To inform the behavioral responses we model in our analysis, we include any available information on how similar ideas have affected claiming decisions in the past. We do not consider the impact on the agency’s administrative costs or program solvency for any of these incentives.
Changing the Early Retirement Reductions
The current incentives are structured to provide the largest annual increase in benefits at the oldest claiming ages and the smallest incentive to delay claiming for individuals considering delaying just past the EEA. As noted previously, individuals who delay claiming after their FRA receive an 8 percent annual increase to their unreduced monthly benefit through DRCs. In comparison, individuals who wait to claim until at least 3 years before their FRA receive an approximate 6.7 percent reduction to their unreduced monthly benefit for each year until they reach their FRA, while claiming 1 year earlier from age 63 to 62 results in an additional 5 percent benefit reduction (Table 1). An individual might not view this 5 percent benefit change as large enough to encourage them to claim benefits beyond age 62. Increasing the benefit for delaying claiming could be more of an incentive for individuals to delay claiming past age 62.
In addition, the prospect of earning an 8 percent increase in benefits through DRCs for delaying benefit claiming after reaching the FRA may be too far in the future for it to be a realistic incentive for the 40 percent of both men and women who currently claim at the EEA. Psychological research has shown that individuals tend to display a present bias, or a tendency to overweigh the value of rewards they can receive immediately. Present bias helps to describe the common finding that individuals often prefer a smaller, sooner reward to a larger, later reward (Loewenstein and Prelec 1992). Trends in benefit claiming are consistent with present bias, as an overwhelming majority of individuals are willing to accept a permanently reduced monthly benefit in order to receive their benefits sooner. If it is difficult to encourage people to delay claiming for a few months or a year, it may be unrealistic to expect them to delay claiming long enough to earn DRCs.
Increasing the benefit for delayed claiming before the FRA would make the monthly change (and therefore, annual change) in benefits from age 62 to 63 (and from age 63 to 64 for those with an FRA of 67) larger than in subsequent years. It is important to note that making the size of the increase larger for each month an individual delays claiming past age 62 is akin to increasing the size of the monthly reduction in benefits over the same period. However, under this incentive, the total reduction for claiming before the FRA would be the same as that under current law (that is, about 25 percent for individuals with an FRA of 66 who claim at age 62 and about 30 percent for those with an FRA of 67 who claim at age 62). Making the suggested changes therefore would not penalize those who cannot delay benefit claiming beyond age 62 (for example, those who become disabled or face a work limitation, are laid off and have few job prospects, or have to care for a disabled spouse or other family member) because the total reduction stays the same.
The proposed change-reductions policy option appears in Table 4 and shows that for all birth cohorts, the annual reduction in benefits from age 63 to 62 would change from about 5 percent under current law to 8 percent under the option. The change in benefits for years closer to the FRA would be smaller than under current law, providing a smaller reduction for those individuals who have waited longer to claim benefits. For example, if an individual with an FRA of 67 waits 3 years past the EEA to claim at age 65, his or her monthly benefit would be reduced by only 9.4 percent under the option compared with about 13.4 percent under current law. By keeping the same total reduction and monthly benefit amount at age 62, this option provides a larger benefit at each subsequent age before the FRA, with the largest difference in the earliest years (Chart 8).
In the example in the chart, the beneficiary has an unreduced retired-worker benefit of $1,370 at his or her FRA of 67.19 Under both the option and current law, the beneficiary’s monthly benefit at age 62 would be about $959. However, under the option, the monthly benefit at age 63 would be about $1,067, compared with only about $1,026 under current law. This represents an additional monthly benefit increase of about $40 under the option for 1 year of delayed claiming from age 62 to 63.