Late Retirement Bonus: How the Government can Incentivize Working Longer

Millions of elderly Americans rely on Social Security benefits as their primary retirement financing mechanism. This defined benefit retirement program, given to qualifying individuals of age and disability, lifts 14 million people out of poverty every year. This program, however, does not come without choices for its beneficiaries. Under the status quo, eligible individuals can start receiving their social security claims as young as age 62 and as late as age 70. While monthly benefits depend largely on earnings history, delaying benefits comes with substantial increases in monthly benefits later on. The hope of this increased benefit is to incentivize work as long as possible for these individuals, as additional workers provide economic and fiscal gains to the United States. The question remains, however, how much people consider these monthly benefit increases when they make their individual retirement decisions.

In a new National Bureau of Economic Research Working Paper, Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, and Tatjana Schimetschek conduct surveys of working-age individuals to investigate alternative Social Security benefit structures to incentivize working longer. They find that individuals increase the average age at which they intend to claim Social Security benefits by about half a year when they are offered lump sums equal in actuarial value to their future benefit increases, and by two-thirds of a year when offered a lump sum equal to their future benefit increases that only is paid if they claim after age 67, the Full Retirement Age (FRA).

The authors go about studying preferences in Social Security benefit payouts by using an age 40-70 subset of the American Life Panel (ALP), a nationally representative sample of 6,000 households, in a survey of preferences over different Social Security Benefit schemes. After calculating each individual’s Primary Insurance Amount (PIA), the authors presented each survey respondent with a choice of retirement age and an individual’s unique corresponding monthly retirement benefit.

These choices of retirement and unique benefit structure were presented using three different models. The first response was a baseline using current escalating monthly benefit calculations. The second response gave an actuarially equivalent lump sum benefit to individuals equal to their increased benefits over claiming at age 62, when claiming at 63 or later. The third response presented escalating monthly benefits until FRA, when additional monthly benefit increases are substituted for actuarially equivalent lump sum payments.

They find that in the first alternative, in which all benefit increases are given in a lump sum, individuals increase their retirement age by about one-half year on average. In the second alternative, where all benefit increases after FRA are given as a lump sum, individuals increase their projected retirement age by two-thirds of a year. The individuals most responsive to these lump sum incentives are those who would claim the earliest in the status quo.

It is important to note that all three of these scenarios represent the same actuarially valued amount of money to the qualifying individual. The only difference is whether these benefits are paid out immediately or later in life. This study suggests that many individuals in this program have a clear preference for lump sum payments over an equally valued annuity stream.

The idea that a government could delay retirement for qualifying individuals has important public policy and macroeconomic considerations. Any policy measure that encourages work later in life is a positive for the Social Security program, because the individuals choosing to still work are paying taxes into the program for a longer amount of time. The program is currently projected to run a deficit in 2033 due to age demographic trends, and changes in retirement age habits would affect this viability date.

Additionally, labor force participation increases as a result of a lump sum incentive would increase the potential gross domestic product of any country that implemented such a program. Such an increase in potential gross domestic product and labor force participation could prove to be vital to countries, like the United States, facing numerous challenges posed by aging populations.

Article Source: Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek, 2014. Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum, National Bureau of Economic Research

Feature Photo: cc/(Anne Worner)