Your Social Security Benefit Start Date

In an actuarial sense, it doesn’t matter when someone starts to receive their Social Security benefit. An earlier start means a lower monthly benefit, a later start increases the monthly payment at the cost of skipping years of benefits. The two approaches are balanced for those who live to their life expectancy. For every individual, however, there are considerations that go beyond the actuarial, beyond the math. A recent study from the National Bureau of Economic Research explored some of those reasons [“Social Security Claiming Intentions: Psychological Ownership, Loss Aversion, and Information Displays,” available online at https://www.nber.org/system/files/working_papers/w31499/w31499.pdf].

According to the researchers, more than half of Americans claim their Social Security benefits before reaching their full retirement age. One important reason may be that 40% of Americans age 55 to 64 have no retirement savings at all, and so they need the money. But they might be still better off by staying longer in the paid work force, delaying their retirement, thereby building a larger retirement benefit both by paying more Social Security taxes and avoiding the benefit reduction that comes with an early start. These additional, more emotional factors were identified by the researchers.

Sense of ownership. Although Social Security is a pay-as-you-go system, with payouts largely funded with payroll taxes on current workers, it has always been presented as an earned benefit. It is therefore not surprising that many people in the study agreed that “The Social Security benefits that I receive will come from the money I contributed.” Those who had the strongest sense of ownership in their benefits were the most likely to claim their benefits before their full retirement age.

Loss aversion. Many people fear losses more than they value gains, as has been well documented in studies of investor behavior. Among those in this study, those with the highest loss aversion were most likely to start benefits early, to reduce the chance of failing to recoup their tax payments.

Expectations of longevity. On the other hand, those who expected to live a long time tended to start their benefits later, perhaps out of fear of outliving their retirement resources.

Information availability. To give respondents a better sense of what is at stake in the decision, they were provided illustrations of cumulative benefits. For example, a retiree who started receiving $1,339 monthly at age 62 would accumulate total payments of $353,500 if he or she lived to age 85. If the same retiree waited to start collecting $2,395 monthly at age 70, the cumulate total at age 85 would be $402,360.

Such information has been shown to influence people, making them more receptive to annuity purchases for augmenting retirement income. Paradoxically, in this case, the group that was shown the higher total accumulation became more inclined to claim early, giving up the possibility of that higher accumulation.

As interesting as these findings may be, for most people family and financial circumstances will be more important drivers of the retirement start date. We can help you evaluate that decision.

(February 2024)

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