Why It’s So Hard to Delay Social Security
Behavioral economists have found that traditional economic models cannot explain what people actually choose to do with their money, including filing for Social Security benefits early – a move that can cost them a lot of money in the long run.
A recent article from Michael Mauboussin and Dan Callahan discusses four prominent investor biases that throw a monkey wrench in our economic models. I want to discuss one of these mental miscues that is particularly relevant to the decision of when to collect Social Security. It is known as hyperbolic discounting, and it could be a big reason why retirees claim Social Security earlier than most economists and financial planners would suggest.
Economists and planners almost universally agree that at least one member of a household should delay Social Security collection until age 70, at which point they max out benefits. For today’s retirees, delaying from the earliest possible claiming age of 62 until the delayed claiming age of 70 would increase monthly benefits by about 76 percent. You have to give up income during those years from age 62 to 69, but you get a guaranteed annuity from the government that will last as long as you do.
Despite this claiming advice, data show that over half of current claimants took their Social Security before age 65, and only about 3 percent delayed until age 70! People are not listening to economists or advisers.
Hyperbolic discounting is a phenomenon that may help describe why people make this seemingly poor decision. Hyperbolic discounting may best be explained through a couple of examples. The first comes from a 2002 research paper titled “Time Discounting and Time Preferences: A Critical Review.” In it, the authors first asked respondents whether they would prefer $10 today or $11 tomorrow. The majority chose $10 today. They then asked respondents whether they would prefer $10 one year from now, or $11 one year and one day from now. The respondents chose $11.
On its face, this is the same decision: Are you willing to wait one day in order to increase the amount you receive by $1? When they’re asked about today and tomorrow, they found that respondents overwhelming preferred the money today. When asked about 1 year from now, respondents thought “what’s an extra day when I’m already waiting an entire year?” This is hyperbolic discounting. We discount the present at a higher rate than the future.
A second example, from Mauboussin and Callahan, is something we can all relate to. When subjects have to choose a snack between a piece of fruit or a donut right now, they choose the donut. When you ask them what they’d like to have for a snack next week, they choose the healthy option. The authors say, “we insist that our future selves will be good even as our present selves enjoy some candy.”
This all relates to claiming Social Security benefits. Everyone I talk to insists that they will delay their Social Security when the time comes. If they’re read the literature, they understand the value of delaying benefits. And the trends do show that more people are delaying, even if by a modest amount. But the overwhelming majority still claim before age 70.
When offered $1,500 per month today or $2,640 per month starting in eight years, hyperbolic discounting takes over and many people opt for the early claiming. The donut is very tempting.
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Mauboussin and Callahan, What’s Going on in Your Brain, October 20, 2015.
Munnell and Chen, Trends in Social Security Claiming, May 2015.
Shane Frederick, George Loewenstein, and Ted O’Donoghue, “Time Discounting and Time Preference: A Critical Review,” Journal of Economic Literature, Vol. 40, No. 2, June 2002, 351-401
Daniel Read and Barbara van Leeuwen, “Predicting Hunger: The Effects of Appetite and Delay on Choice,” Organizational Behavior and Human Decision Processes, Vol. 76, No. 2, November 1998, 189- 205.