Josie Bruin is considering her retirement options. If she claims her Social Security benefits when she turns 62, she will receive $1,339 every month for the rest of her life. But waiting until she’s 66 raises this to $1,793 a month; waiting till 70, she gets $2,395. So Josie decides she’ll hold off until she’s 70, which will also add up to more total income the longer she lives — $160,000 or even more if she lives into her 90s. Logical choice, right? So why do 40 percent of Americans claim their Social Security retirement benefits at age 62, locking themselves into lower monthly payments for a lifetime? Suzanne Shu, an assistant professor of marketing at UCLA Anderson School of Management who investigates how individuals form judgments and make decisions, and co-investigator John Payne of Duke University recently completed research on 3,000 people between the ages of 40 and 60 that examines psychological factors that can have a powerful impact on these decisions. Shu recently presented their findings in Washington, D.C., at the annual meeting of the Retirement Research Consortium. Shu discussed her work in behavioral economics with UCLA Today senior writer Judy Lin.
What prompts this research?
We have all these baby boomers retiring, and it’s a huge decision to figure out how to spend your Social Security, savings, investments in 401k plans and so forth to have for a nice retirement but also without running out of money before you die. Economists have been studying this problem for years, and they like to build models that look at the dollars and cents piece of it. Their advice is pretty consistent: Financially, it works out much better to delay. With Social Security, every year that you’re willing to wait increases the amount you’ll receive by about 8 percent. In today’s marketplace, you can’t invest in anything risk-free that will give you this kind of return.
So why don’t more people follow the advice to wait?
There are four big factors that affect people’s decision. One of the most significant is loss aversion — the idea that giving something up is much more painful than receiving something. For Social Security this is an interesting thing. We thought that if we presented people with a table showing them how much money they’re losing if they claim early, they would say, “Oh, I don’t want to give up that money. I’m going to claim late.” But instead, people say, “If I don’t claim now, I’m going to get zero [now].” It really bothers people. The more a person dislikes losses, the earlier they want to claim.
Another factor you looked at was fairness. What’s this about?We’re actually measuring perceived or psychological ownership, this sense of “It’s mine. I earned it. I want it.” Many people think their benefits come directly from money they contributed. But the way the Social Security system works is that current retirees’ benefits come out of the deductions from your and my paychecks; when we retire, younger workers are paying our benefits. So it’s really not your money that you’re getting back. Going forward, we want to look at whether there are ways to remind people that it’s part of this bigger pool, that we’re all in it together.
How did people’s thoughts about life expectancy factor into their decision?
It seems logical enough; if you think you’re not going to live long, then you want to claim your benefits earlier. But people’s estimates of how long they’re going to live are actually easily changed by how you ask the question. In a paper we published earlier this year, when we asked “What do you think is the chance you’ll die by [a certain age]?” they’ll start thinking, “Oh, my cholesterol’s high, and my mother died young.” The life expectancy they give is about 10 years higher when we asked, “What’s the chance you’ll live to [a certain age]?” and they start thinking, “I do get some exercise, and I eat a lot of salad and vegetables.”
What about people’s willingness to be patient?
The more patient you are, the more willing you are to wait to claim your benefits. And the more impatient you are, the less you are willing to wait. We asked a question along the lines of “Imagine you could have $100 right now or $150 in a month. Which would you prefer?” What we’re essentially getting at is the tradeoff they require to wait.
Do some people worry that Social Security won’t be around when they retire?
The younger people in the 40-60 age group we surveyed were more likely to think that. But when I go to Washington to present these studies and talk with people in the Government Accountability Office and Social Security Administration, among others, the general agreement is that Social Security is not going away ever because public outcry would prevent that.
Is the take-home lesson that people aren’t as rational as we like to think?
We’re often rational in making the best decision we can in the moment, but the things that are affecting us in this moment might not be affecting us in another moment. We’re picking what’s making us better off right now. We’re not always looking far enough ahead for what’s going to make us better off in the long run.
Social Security was originally put in place to make sure that old people in our society were taken care of, that they have a comfortable retirement. We’re not saying that everybody should wait until they’re 70 to claim their benefits. Each individual should sit down and take all the right things into account, including their long-term financial health, before making the best decision that you can.
To help you make your decision, Shu recommends taking a closer look at your individual situation with this free retirement calculator from PBS NewsHour retirement expert and columnist Larry Kotlikoff. For more details on Shu’s research, see this presentation.
