Revisiting Retirement and Social Security Claiming Decisions

90 Pages Posted: 2 Aug 2021 Last revised: 29 Aug 2023

See all articles by Neha Bairoliya

Neha Bairoliya

Marshall School of Business - University of Southern California

Kathleen McKiernan

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: July 30, 2021

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 explain this puzzling phenomenon within the scope of an augmented, albeit standard, forward-looking life-cycle framework. This contrasts with prior literature that relies on behavioral channels for an explanation. Toward this goal, we document how policy rules and claiming frictions — budgetary shocks, misbeliefs, and bequest motives — may impact claiming behavior. 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 impact of these mechanisms. Counterfactual experiments show that the marital benefits and claiming frictions can explain 53 percent of overall early claims. Policy experiments highlight the role of these mechanisms in limiting the ability of households to augment their claiming ages in response to an increase 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 24 percent higher if the impact of these mechanisms is not taken into account.

Keywords: Labor supply, Social Security, annuity, misbeliefs, life-cycle, health, marriage, spousal benefits, survivors benefits, bequest motive, preference heterogeneity.

JEL Classification: J14, J26, E21, H55

Suggested Citation

Bairoliya, Neha and McKiernan, Kathleen, Revisiting Retirement and Social Security Claiming Decisions (July 30, 2021). Available at SSRN: https://ssrn.com/abstract=3896031 or http://dx.doi.org/10.2139/ssrn.3896031

Neha Bairoliya (Contact Author)

Marshall School of Business - University of Southern California ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Kathleen McKiernan

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

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