Faculty of Economics and Business Administration Publications Database

Optimal Social Security Claiming Behavior under Lump Sum Incentives: Theory and Evidence

Mitchell, Olivia S.
Rogalla, Ralph
Month: November
ISSN-Print: 0022-4367
Link External Source: Online Version
Year: 2019
Keywords: Retirement; Annuity; Delayed claiming; Pension; Early retirement; Social Security

Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.