Jacob Smith contributed to this post.
The Bipartisan Policy Center’s Debt Reduction Task Force included in its report a detailed plan to strengthen Social Security. Most of the proposals in the package either adjusted future benefits or raised additional revenues to ensure the solvency of the program. There was one recommendation, however, that pursued a behavioral approach – improving the Social Security system by informing individuals of the financial cost to claiming benefits at an early age.
One simple statistic spoke volumes as the Task Force tackled Social Security: approximately half of all workers begin claiming benefits at age 62, the earliest eligibility age.* The program is designed so that retirees are projected to receive the same total lifetime benefits regardless of when they retire.
Therefore, when beneficiaries choose to collect Social Security benefits at a relatively early age, they receive lower monthly benefits for the rest of their lives to compensate for the additional months of enrollment in the program. In some cases (e.g., manual laborers who face physical difficulties), individuals are forced by their circumstances to claim early. But for most, the logical decision is to delay the collection of benefits – producing a far more generous monthly check – and thereby avoid risking one’s financial stability in later years. Yet, as noted above, we see that most individuals are eager to claim, opting for benefits at the earliest possible date.
The answers to why rational individuals make such decisions lie in the field of behavioral economics – the study of how people comprehend and process economic scenarios. Aside from those who find themselves hard-pressed financially to wait, incomplete information – many workers do not understand how the benefit formula operates – and the inability to defer gratification are two important culprits that obfuscate informed, prudent decision making.
Behavioral economist Richard Thaler discusses this topic in last month‘s New York Times column, “Getting the Most out of Social Security.” Thaler points to the lack of actuarial comprehension that individuals face when making retirement decisions. Also, people are naturally inclined to value present money disproportionately more than future income. These factors lead many to believe that the best option is “take the money and run;” they do not realize or adequately weigh the idea that delaying entry into Social Security past age 62 could produce a lasting advantage by guaranteeing them greater retirement security in later years.
What, then, should be done about this information gap? The Task Force report recommended that the Social Security Administration (SSA) provide workers with better warnings and information about the costs of taking early retirement benefits. Instead of labeling the ability to claim benefits at age 62 the “Early Eligibility Age,” the report called for changing it to the “Reduced Benefit Early Option,” or a similar title that conveys the downside of the option. The hope is that such a signal would encourage workers to consider the ramifications of their decisions rather than believing that they have won a lottery that enabled them to become prematurely eligible for Social Security.
In a similar vein, age 66 is currently labeled the “full“ or “normal retirement age.” Only a small percentage of individuals work past that age. Thaler notes that the words “normal” and “full” are very powerful in determining when people choose to retire, yet they are somewhat misleading. “Benefits at that age are not ‘full’ and retiring at that age is not ‘normal,’” Thaler writes. The term “full retirement age” seems to imply that one receives full monthly benefits at this age, but the monthly benefits that a retiree can expect to receive actually continue to grow until one reaches the age of 70. And why does age 66 warrant the term “normal?” Workers in jobs that require manual labor may have encounter difficulties significantly before then, while those in other professions may be able (and choose) to work until age 70 or later. Thaler concludes that “designation of a full retirement age can serve as an anchor that influences people’s choices, and may help explain why so few people delay claiming past age 66.” Eliminating this language would make workers more likely to take advantage of the financial benefits obtained from waiting to receive Social Security benefits.
Another behavioral approach that should be considered is to require those choosing the early retirement option to sign a boldly printed statement that acknowledges the monthly cut in benefits they have elected to take. Ensuring that every worker is fully aware of the consequences will help to combat both the lack of information and the propensity to select immediate gratification.
There is one final component to this strategy. Individuals who digest this information and are influenced by these signals must be provided with the assistance that is often necessary to extend their working lives. They may no longer be able to adequately perform the functions required by their professions or simply find themselves unemployed at the latter stages of their careers, and so the government should put a greater focus on retraining programs for this population.
Any package to address the long-term solvency of Social Security should contribute to the broader national goal of economic growth. Extending worker longevity will directly increase the productive output of our economy, and also will provide more retirees with the financial security that derives from larger monthly benefits. The “reduced benefit early option” will serve to remind workers that patience truly is a virtue.
* Turner, John. Promoting Work: Implications of Raising Social Security’s Retirement Age, Center for Retirement Research at Boston College, Boston College, MA, http://crr.bc.edu/images/stories/Briefs/wob_12.pdf.