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Why Most Baby Boomers Take Social Security Too Early


According to Boston University economics professor Laurence J. Kotlikoff and his colleagues, most retirees choose to begin taking their Social Security benefits much too early, leaving tens of thousands of dollars on the table. Kotlikoff is the founder of the website which helps prospective retirees make the often complex Social Security decisions.

Why It Pays to Delay Claiming Social Security

He and his fellow researchers used his program to compare the optimal Social Security decisions retirees with those they actually do make. In their article, “How Much Lifetime Social Security Benefits Are Americans Leaving On the Table?,” they conclude that “virtually all American workers age 45 to 62 should wait beyond age 65 to collect. More than 90 percent should wait till age 70. Only 10.2 percent appear to do so. The median loss for this age group in the present value of household lifetime discretionary spending is $182,370.”

The full retirement age for Social Security for those born in 1960 or later is 67. (It’s a bit earlier for those born before 1960.) Retirees can choose to take their benefits beginning at age 62. The catch is that their benefits are reduced by 30% for the rest of their lives. The reduction is smaller, the closer the start date gets to age 67. Further, those who delay receiving benefits past age 67 receive an 8% increase in benefits for every year they wait until age 70. And those increased benefits are adjusted each year for inflation for the rest of their lives. (The Social Security Administration provides a calculator here for determining the effect of taking early or delayed benefits on your monthly payment.)

The Social Security system further encourages workers to delay taking benefits by penalizing those who do so and continue to work by exacting a penalty in reduced benefits, depending on the worker’s earnings. This affected a lot of people who took early benefits when they couldn’t work during the Covid-19 pandemic and then went back to work after the pandemic ended.

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Yet, according to one study, 40% of men and 47% of women begin taking their Social Security at age 62 and only 3% of men and 4% of women wait until age 70.

Practical Reasons Retirees Claim Social Security Early

So, why do so many retirees make decisions regarding their Social Security that are against their own best interests? Reasons include:

  • The system is complicated, especially when it comes to spousal benefits. So, many people may not be making optimal decisions just because it’s not clear what’s optimal.
  • It can be difficult to forego receiving a monthly check from the federal government, especially if money is short. I’ve commented before on how wealthier seniors get a bigger benefit from Social Security than poorer seniors both because they’re more likely to delay receiving benefits and they’re more likely to live longer, receiving their higher benefits for more years.
  • Seniors may also make wrong judgments about their likely longevity. You’ll certainly be leaving money on the table if you delay taking benefits until age 70 and then die during your 60s. If you wait until age 70 to take your Social Security, the crossover when your increased benefits make up for the three years of benefits you did not receive after age 67 is at about age 80. So even if you were to die during your 70s, you would have been better off not waiting to maximize your benefit. However, the average life expectancy at age 65 is about 20 years to age 85, and for married couples at age 65, there’s a 50% chance that one spouse will live to age 94.
  • According to Kotlikoff in his book Social Security Horror Stories: Protect Yourself from the System & Avoid Clawbacks, if you call the Social Security Administration it’s as likely as not to give you the wrong advice about when to begin taking benefits.

Of course, for some people it does make sense to begin taking Social Security early. If you can be sure due to your health situation that it’s quite unlikely that you’ll live into your 80s, you’ll be better off receiving your benefits while you can. Others may have no choice. If delaying taking benefits means going hungry, losing your house, or living on the street, you’ll take the money that’s available.

On the other end of the wealth continuum, the calculus may be somewhat different for those who are disciplined investors. If the person taking early Social Security invests the funds and receives a decent return, this may well postpone the crossover date on which the increased Social Security payment outweighs the cost of foregoing benefits for longer. No doubt, this factor further favors the more affluent who can afford to invest their benefits rather than spending them.

Psychological Factors that Encourage Early Claiming

A study by Suzanne Shu and John Payne, researchers at Cornell and Duke Universities, examines the psychological reasons many retirees begin taking their Social Security early. In their working paper, “Social Security Claiming Intentions: Psychological Ownership, Loss Aversion, and Information Displays,” they conclude that four factors influence the decision to take Social Security early, a sense of ownership, loss aversion, longevity expectations, and attributes of patience:

The stronger one’s sense of psychological ownership of one’s Social Security benefits, the sooner one intends to claim. The more loss averse one is, the earlier he or she intends to claim. Also, as might be
expected, longer subjective life expectations and greater patience to receive greater rewards are both predictive of an individual’s later claiming intentions.

Many workers who have been paying into the Social Security system for decades feel an ownership of their benefits. Shu and Payne surveyed workers and asked them whether or not they agreed with the statement “The Social Security benefits that I receive will come from the money I contributed” (acknowledging that this is not an accurate description of how they system works). They found a strong correlation between agreement with the statement and an intention to claim Social Security early.

In terms of loss aversion, there have been many studies that have found that people feel worse about losing something they already own to a higher degree than they feel good about the prospect of greater rewards in the future. As the saying goes, “a bird in hand is worth two in the bush.”

Shu and Payne also tested whether showing future retirees their higher likely cumulative benefits if they waited until age 70 to claim would influence their decision and were surprised to find that it would not, in contrast to earlier studies regarding annuities. They surmise that the difference relates back to the first psychological factor, the sense of ownership of Social Security benefits. “In fact, cumulative payout information appears to encourage earlier claiming intentions rather than later claiming, the opposite of its effect on annuities. The difference between the annuity purchase decision and the Social Security claiming decision may be related to the issue of psychological ownership; with an annuity, the choice is one of purchase, while with claiming, the choice is of exercising an already held (owned) option.”

Public Policy?

It’s difficult to say what all this means in terms of public policy changes that would help people make better decisions about Social Security claiming other than better training of Social Security Administration personnel so that they provide better advice. Better funding of the Social Security Administration so it can hire more workers should reduce wait times and make it easier for enrollees to receive necessary information. Adding software to the Social Security website that calculates total payments based on different longevity and inflation expectations may also help, though Shu and Payne’s study indicates that it may not.

The elephant in the room, of course, is that fact that the Social Security trust fund is projected to run out of money in about 10 years, causing a 30% reduction in benefits across the board unless Congress acts to shore up the system before then. To the extent retirees believe that Congress will not act in time — and the longer it delays the more difficult it is to correct the imbalance between money coming in and money pledged to go out — all the above calculations may be wrong. Indeed, the bird in hand may be worth a lot more than the two in the bush.

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