social security

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From the latest Economic View column:

Social Security may be the most beloved of all the government’s programs, partly because it requires so little thinking. You pay taxes while you work, then you and your spouse collect until you die. This description oversimplifies things, of course. Social Security, as it’s currently constituted, is refreshingly straightforward but you do have to make one important choice, and many people could make their lives after retirement better if they chose differently.

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The Center for Retirement Research at Boston College releases an interesting new paper reminding us why more knowledge does not automatically mean better decision making. The paper looks at how annual social security statements affect people’s knowledge about social security and their decision about when to take it. About 15 years ago, the U.S. government began mailing a paper statement of a worker’s past earnings along with an estimate of their benefits at selected claiming ages. The purpose of the statement was to help workers make smarter decisions about retirement plans.

Looking at longitudinal survey data of workers aged 55-70, researcher Giovanni Mastrobuoni finds that the social security statement does increase worker knowledge about benefits. When asked to provide an estimate of how much social security they expect to receive, workers received a statement were more likely to provide a benefit estimate–and a more accurate one at that. (Note: The survey’s timing allows Mastrobuoni to distinguish between workers who had and had not received statements).

But when looking at how this knowledge affects their retirement plans, and whether to continue working another year or begin to collect social security, there is no clear evidence showing that people use it.

In short, it appears that the Statement does not improve individuals’ responsiveness to retirement incentives. This result could mean that people are behaving optimally before they receive the Statement or that the benefits they gain from reading the Statement are relatively small. Further research in this area is needed.

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Social Security is an actuarially fair program, which means if you have an average life expectancy, it doesn’t matter when you start collecting benefits. You’re going to collect the same amount if you start at age 62, 65, or 70, and live an average lifespan. People collect more if they live longer or less if they die earlier.

Despite this fact, people can be influenced about when to start collecting benefits through particular messaging, according to three researchers. The trio tested a series of 10 frames using the behavioral economic concepts anchoring and framing. Interestingly, all of these various frames began with a short statement about the actuarially fair nature of Social Security, which appears to have been quickly overlooked.

The message that led to earliest start collection dates, a year earlier relative to the government’s current messaging, emphasized that early starters get less money, but that the “breakeven” age for people staring later was quite far down the line. For instance, the frame says that by delaying starting benefits from 62 to 63, you have to live “at least 15 more years in order to get back the $18,588.00 you forfeited by waiting one year.” In contrast, the latest benefit start dates came from messages emphasizing the gains that accompanied delaying collection and the consumption benefits of those extra dollars.

More on the experiment and findings is at the Rand Behavioral Finance Forum here.

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Peter Orszag responds to yesterday’s post about the relevance of penalties on wage earnings before reaching full employment age – also known as the retirement earnings test.

It is true that if people don’t understand how the retirement earnings test (RET) works, knowing that it no longer applies starting at the full benefit age could cause some people to claim at that age. (Those who do understand the RET know that the recalculation that occurs when a beneficiary subject to the RET reaches the full benefit age compensates them for the benefits offset while they were still working – again making the benefit actuarially fair).

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From a speech last week by Congressional Budget Office Director Peter Orszag at the Retirement Research Consortium:

Distribution of the Age at Which Primary Beneficiaries Claim Social Security Benefits by Birth Year

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