Accounting for Social Security claiming behavior

Pashchenko, Svetlana and Porapakkarm, Ponpoje (2019): Accounting for Social Security claiming behavior.

Abstract

Why do most individuals claim Social Security benefits before the full retirement age? Claiming benefits early results in a substantial reduction in pension income, yet many people claim as early as possible (age 62) or soon thereafter. We argue that by answering this question, we can make two additional contributions to the literature. First, early claiming is equivalent to low demand for Social Security annuity, thus it offers a unique context for studying the well-known annuity puzzle. Since participation in Social Security is nearly universal, the low demand for this annuity cannot be explained away by market failures. Second, we show that claiming decisions are closely linked to the subjective rate of time preferences and thus can provide a new angle for the identification of this parameter. We provide a quantitative analysis of claiming decisions using a rich structural life-cycle model that matches many important features of the data. We find that the claiming puzzle can be attributed to a combination of three factors: (i) the discrepancy between individuals' subjective valuation of Social Security annuity and its implicit price, (ii) strong bequest motives, (iii) pre-annuitized wealth. We show that if individuals were rewarded for delaying claiming not with additional annuity income but with equivalent (in present value terms) lump-sum payments, the fraction of early claimers would be significantly reduced.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social Security, Retirement, Annuities, Consumption and Saving, Life-Cycle Model
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies

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