John Shoven, Stanford UniversitySita Nataraj Slavov, American Enterprise Institute

14th Annual Retirement Research Consortium ConferenceAugust 2-3, 2012Washington, DC

The Decision to Delay Social Security: Theory and Evidence

Research Questions Claim Social Security between 62 and 70. Due to actuarial adjustment, delay is equivalent to

buying an annuity. Questions: Is this annuity actuarially fair? On average? For specific subgroups? (Men, women, couples) At specific times? (Low versus high interest rates)

Does observed claiming behavior reflect the gains from delay?

When to claim Social Security?

Delay equivalent to buying annuity. Adjustment widely believed to be actuarially fair.

Claiming Age

Own Benefit (% of PIA)

Own Benefit: Percent Increase

from 1-Year Delay

Spousal Benefit (% of Primary

PIA)

Spousal Benefit: Percent Increase

from 1-Year Delay62 75.0% 35.0%63 80.0% 6.7% 37.5% 7.1%64 86.7% 8.3% 41.7% 11.1%65 93.3% 7.7% 45.8% 10.0%66 100.0% 7.1% 50.0% 9.1%67 108.0% 8.0% 50.0% 0.0%68 116.0% 7.4% 50.0% 0.0%69 124.0% 6.9% 50.0% 0.0%70 132.0% 6.5% 50.0% 0.0%

From Social Security website:“If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.”

Methodology Stylized households, age 62 in 2012 (full

retirement age = 66) Single male Single female One-earner couple Two-earner couple (75%) Two-earner couple (90%)

Assume average mortality for 1950 cohort. Compute NPV under all possible claiming

strategies.

Couple Strategies One-earner couples: Claiming age for earner spouse. Claiming age for non-earning spouse – must be

after earner spouse has either claimed or reached age 66.

Two-earner couples: Claiming age for both spouses. In addition: one spouse can claim spousal benefits

starting at age 66. Survivor benefits paid to surviving spouse if

greater than own benefit.

NPV-Maximizing Claiming Ages for Singles

Gains from Delay for Singles

NPV-Maximizing Claiming Ages for Couples

Gains from Delay for Couples

Main Result: Deferring Social Security is Actuarially Advantageous

Deferring is: A good deal for single men in average health. A better deal for single women in average health. A so-so deal for the lower earner in a couple. A very good deal for the higher earner in a couple.

Intuition For singles: Delay buys a single life annuity. For couples: Survivor (widow) benefits are based on the higher

of the two individual benefit amounts. Higher earner’s benefits are paid out as a second-

to-die annuity (for 22 to 25 years). Lower earner’s benefits are paid out as a first-to-die

annuity (12 to 15 years). All annuities sold on the same terms. (Second-to-Die)>(Single Life)>(First-to-Die).

Discussion Could benefit from separating retirement and

claiming decisions. Implications for financing retirement: Standard advice: claim Social Security and

annuitize 401(k) assets. Alternative: Use 401(k) assets to finance Social

Security delay. Note: NPV-maximizing strategy not necessarily

optimal. Insurance value of annuity “purchased” through

delay. Liquidity constraints, precautionary savings.

Fraction Claiming Within 2 Months of Age 62

Mean Std. Err.Married Males 0.741 0.019Married Females 0.671 0.018Single Males 0.724 0.045Single Females 0.734 0.046

Mean Std. Err.White 0.70 0.01Black 0.62 0.04Other Race 0.67 0.06

Mean Std. Err.Some College 0.73 0.01No College 0.64 0.02

Mean Std. Err.Pre-1943 0.70 0.011943 or Later 0.64 0.03

Mean Std. Err.Pre-2000 0.71 0.022000 or Later 0.67 0.02

By Gender and Marital Status

By Birth Cohort

By Year of Turning 62

By Education

By Race

Conclusions Delaying Social Security increases NPV for most

people, particularly at low real interest rates. Even at higher real interest rates, couples gain

from delaying primary earner’s benefit. Gains from delay have increased since 1962 due

to mortality improvements, rule changes, and interest rate changes.

Majority of people actually claim at age 62 or when they stop work.

Additional material …may include if time permits.

History Delays introduced: 1956 for women 1961 for men Delay from 62 to 65

Delay credits beyond full retirement age introduced in 1972

Survivor benefits: Flat 82.5 percent of primary earner’s PIA in 1961

Since 1961 … Full retirement age has increased to 66. Increased credits for delay beyond full retirement

age. Survivor benefit depends on deceased spouse’s

actual benefit (reflects delay). Life expectancy has increased Interest rates have fallen: 2.5% real in early 1960s versus 0% real today.

1962 versus Today

Single Male 7.24%Single Female 8.80%One-Earner Couple Both Delay 8.26%

Primary Delays 6.81%Two-Earner Couple Both Delay 6.73%

Primary Delays 6.15%

Single Male -3.98%Single Female 1.61%One-Earner Couple Both Delay -3.15%

Primary Delays -2.23%Two-Earner Couple Both Delay -4.72%

Primary Delays -1.96%

Actual: 2013

Actual: 1962

Impact of Mortality GainsSingle Male 7.24%Single Female 8.80%One-Earner Couple Both Delay 8.26%

Primary Delays 6.81%Two-Earner Couple Both Delay 6.73%

Primary Delays 6.15%

Single Male 0.84%Single Female 6.31%One-Earner Couple Both Delay 3.75%

Primary Delays 3.99%Two-Earner Couple Both Delay 2.29%

Primary Delays 3.78%

Counterfactual 1: 2013 Rules and Interest Rate, 1962 Mortality

Actual: 2013

Impact of Interest Rates

Single Male 0.84%Single Female 6.31%One-Earner Couple Both Delay 3.75%

Primary Delays 3.99%Two-Earner Couple Both Delay 2.29%

Primary Delays 3.78%

Single Male -4.40%Single Female 1.16%One-Earner Couple Both Delay -0.55%

Primary Delays 0.60%Two-Earner Couple Both Delay -2.10%

Primary Delays 0.73%

Counterfactual 1: 2013 Rules and Interest Rate, 1962 Mortality

Counterfactual 2: 2013 Rules, 1962 Mortality and Interest Rate

Impact of Rule Changes

Single Male -3.98%Single Female 1.61%One-Earner Couple Both Delay -3.15%

Primary Delays -2.23%Two-Earner Couple Both Delay -4.72%

Primary Delays -1.96%

Single Male -4.40%Single Female 1.16%One-Earner Couple Both Delay -0.55%

Primary Delays 0.60%Two-Earner Couple Both Delay -2.10%

Primary Delays 0.73%

Counterfactual 2: 2013 Rules, 1962 Mortality and Interest Rate

Actual: 1962