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Revisiting Retirement and Social Security Claiming Decisions

Presented at the Pension, Retirement and Ageing Seminar Series, co-hosted by CEPAR and the UNSW School of Risk and Actuarial Studies

Title: Revisiting Retirement and Social Security Claiming Decisions

Presentation Date: 22 May 2023

Speaker: Kathleen McKiernan (Vanderbilt University)

Abstract: The Social Security (SS) program structure presents a trade-off between the number of years the benefits are received and the size of those benefits. SS claiming behavior, especially of those Americans with high life expectancy, suggests that older workers place little value on the longer-term annuity of these benefits, preferring instead to start receiving benefits as early as they can, even though this option reduces the overall payout. We provide answers to this puzzle within the scope of an augmented, albeit standard, forward-looking life-cycle framework, in contrast to prior literature relying on behavioral channels. Toward this goal, we document claiming frictions that may prevent households from delaying benefit claims. We build a structural life-cycle model of consumption, savings, retirement and Social Security claiming with rich heterogeneity in demographics and family structure, to quantify the role and potential costs of these frictions. Counterfactual experiments show that the claiming frictions - SS marital rules, budgetary shocks, misbeliefs, and bequest motives - can explain 78 percent of the overall early claiming rates in the model. Policy experiments highlight the role of these frictions, in limiting the ability of households to augment their claiming ages, in response to changes in the normal retirement age. This is found to be especially true for singles who lack insurance through their spouses. Aggregate lifetime benefit payouts after such a policy change are found to be up to 40 percent higher if the impact of claiming frictions on behavior is not taken into account.