Optimal Social Security Claiming Behavior under Lump Sum Incentives: Theory and Evidence

Abstract

Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.

Keywords: Retirement, annuity, delayed claiming, pension, early retirement, Social Security

JEL Classification: G11, G22, H55, J26, J32