Accounting for Social Security Claiming Behavior



The paper examines why most individuals claim Social Security benefits before the full retirement age. Early claiming results in a substantial reduction in pension income, yet many people claim as early as possible, age 62, or soon thereafter. Since delaying claiming is equivalent to purchasing additional annuity income, this behavior is consistent with the so-called annuity puzzle. We provide a quantitative analysis of claiming decisions (or equivalently, of the demand for the Social Security annuity). Our tool is a structural lifecycle model calibrated to match many important features of the data.

The paper found that:

  • One of the important factors accounting for the low demand for public annuities is a significant discrepancy between: (i) the individuals’ subjective discount rate, and (ii) the discount rate implied by the implicit price of the Social Security annuity.
  • Two of the commonly named impediments to private annuitization – mean-tested benefits and medical expenditures – are not important drivers of individuals’ decisions for when to claim Social Security benefits.
  • Pre-annuitized wealth and bequest motives play a major role in the decisions to collect Social Security benefits. Our counterfactual experiments show that if the amount of basic Social Security benefits is scaled down or if the strength of the bequest motive is diminished, significantly more people will postpone claiming.

The policy implications of the findings are:

  • Given that many people consider themselves sufficiently annuitized even when they claim at age 62, late claimers should be awarded not with higher pension income but with lump-sum payments.
  • We show that the policy of providing lump-sum payments instead of increasing Social Security benefits is very effective in inducing individuals to delay claiming.