People get just 70 percent of their full Social Security benefit if they claim at 62, the full benefit at 67, and 124 percent of the benefit if they claim at 70. The gain from waiting is so big that it pays for most people to keep working, or even to dip deep into your retirement savings early, to cover your expenses so you can delay claiming.
A 2022 study found that “virtually all” American workers then in the 45- to 62-year-old age group should wait beyond age 65 to start collecting Social Security checks. It said that more than 90 percent should wait till age 70, yet only 10 percent appear to do so. Many start collecting checks on the first date they’re eligible, once they turn 62.
To put it bluntly, people are making expensive choices. “The median loss for this age group in the present value of household lifetime discretionary spending is $182,370,” the researchers found. For that amount of money you could almost buy a Mercedes AMG-S63. Or, alternatively, pay a few medical bills.
I’m interested in two things. One is why people make this choice when it is so often a mistake. The other is why our system makes it so easy for them to make this mistake. I feel about premature claiming the same as I feel about state-run lotteries, which prey on the desperate and the dreamers. I don’t claim early and I don’t buy lottery tickets. The mistakes other people make indirectly benefit me by raising money that I won’t have to pay in taxes, and that seems unfair.
A caveat: Delaying claiming isn’t right for everyone. If you are in poor health or have other reason to think you’ll die young, grab the government’s money while you can. Likewise if you fear you’ll have to declare bankruptcy unless the checks start coming. A report last year by the Center on Budget and Policy Priorities said about 40 percent of people in their early 60s report a disabling condition, and about 40 percent of recent retirees report being forced out of work. For some such people, claiming Social Security early may be unavoidable.
That said, many other retirees can wait but don’t. Suzanne Shu of Cornell has done deep research on the psychology of early claiming. She told me that a lot of people when surveyed in their 50s say they plan to claim late, understanding that the monthly benefit is higher for late claimers. But as age 62 approaches, they crumble.
“It’s a bit like having a chocolate chip cookie in front of you on the table,” she said.
The people who are most likely to crumble are those who perceive the benefit as a kind of possession, as opposed to a government benefit that’s paid mostly out of the payroll taxes on current workers, she and John Payne of Duke found in a paper last year.
“Social Security is a program that most American workers think they already have as an endowment. They want it as soon as they can get their hands on it,” she told me.
People with a high degree of loss aversion are also likely to claim early, Shu and Payne found. That’s counterintuitive, because by claiming early and getting smaller checks, they lock in a lifetime loss. But that’s not how the early claimers see things, Shu, who has a doctorate in behavioral science, told me.
People who are loss-averse feel the pain of a loss more acutely than they feel the pleasure of an equal or even bigger gain. A highly loss-averse person frets about losing benefits by postponing claiming and then dying earlier than expected. That potential loss looms larger for the person than the more likely outcome of bigger checks over a normal life span.
Nudges to get people to claim later can cause them to claim even earlier, previous research has found. For example, telling people how many years they need to live to do better by delaying claiming may cause many to fixate on the risk of an early demise. Graphing the benefits of delaying claiming doesn’t help either, another study found.
In a journal article last year, Shu and three other researchers tested 13 interventions. The ones that worked got people to focus on behavioral norms, the possibility of feeling regret in the future from claiming too early, the benefits to one’s future self from claiming later and the risk of living long and therefore needing the biggest checks possible.
I salute Shu and her fellow academics for trying to help. But the problem they’re trying to solve would be smaller if the Social Security formula were changed to make it truly actuarially fair — that is, with a reduced penalty for claiming early and a smaller benefit for claiming late. Rising longevity spoiled the original formula because the bigger checks from delaying started lasting longer when people started living longer, making a delay in claiming ever more attractive.
In a statement to me for this newsletter, a Social Security Administration spokesperson wrote that the terms “were enacted by Congress in 1983” based on expectations for longevity and interest rates and can be changed only by another act of Congress.
One possibility is to drop the concept of actuarial fairness and focus instead on income adequacy. A 2014 study published by the Social Security Administration found that one small tweak — namely, increasing the financial advantage of delaying claiming by one year, from 62 to 63 — could make a meaningful difference in people’s behavior. More than that could be done.
If you’ve read this far, there’s a good chance you’re one of those people who’s thinking of delaying claiming Social Security benefits past your full retirement age, or have already done so. Congratulations. But spare a thought for people your age who didn’t or couldn’t wait.
Elsewhere: Warren Buffett Has a Lot of Cash
Check your wallet. Count your coins. Look at your checking account. If the cash adds up to less than $325 billion, then you have less than Warren Buffett’s Berkshire Hathaway had at the end of September. A lot of the latest increase in cash and equivalents (mostly Treasury bills, actually) came from selling shares in Apple, which is still the company’s biggest stock holding. Buffett said this year that it made sense to sell and pay capital gains taxes now because the tax rate is likely to rise. He’s also not seeing any great ways to spend cash on stocks, including those of Berkshire itself. A warning for the rest of us, perhaps.
Quote of the Day
“The historian must retell, with a new richness, the story of what some one of the worlds of the past was, how it ceased to be what it was, how it faded and blended into new configurations, how at every stage what was, was the product of what had been, and developed into what no one could have anticipated. All of this to help us understand how we came to be the way we are, and to extend the poor reach of our own immediate experience.”
— Bernard Bailyn, presidential address at the American Historical Association annual meeting (Dec. 28-30, 1981)
The post Why Do So Many Americans Pass Up Bigger Social Security Checks? appeared first on New York Times.
