Probabilistic Thinking and Early Social Security Claiming 8th Annual Joint Conference of the Retirement Research Consortium “Pathways to a Secure Retirement” August 10-11, 2006 Washington, D.C. Adeline DelavandeMike PerryRobert J. Willis RAND Corp. Univ. Nova de Lisboa CEPR University of Michigan

Motivation Do people claim SS based on their survival expectations? Hurd, Smith and Zissimopoulos - HSZ (2004) –Use direct measures of survival expectations –Findings: subjective survival of 0 associated with early claiming; otherwise, no effect Is the effect found by HSZ too small? –Survey measures of survival expectations capture much individual heterogeneity in risk –But also have a lot of measurement error

This Paper We reexamine whether people claim SS based on their survival expectations Correct measurement error in elicited subjective survival probabilities using rich set of risk factors as instruments Findings: People act on their subjective survival beliefs –Statistically and economically significant effect of subjective survival on SS claiming for people working at 62 -elasticity of claiming probability with respect to survival probability = -1.24

This Paper (cont.) Compare with predictions of objective survival probability based on same risk factors –Similar effect on SS claiming –Do not contain more information than subjective survival to explain SS claiming Our findings suggest that people –have highly hetereogenous mortality expectations – their expectations are largely rational –they act on these beliefs in deciding when to claim Social Security benefits

The Analytical Samples Use data from the Health and Retirement Study (HRS) Follow HSZ and study 2 groups 1. People who are retired by age 62 –Analyze SS claiming by age People who are NOT retired by age 62 –Analyze joint decision to retire and claim by age 64

Early Retiree Sample: Claiming by those retired by age % claim in first year of eligibility 89.6% claim by third year No effect of survival expectations (all specifications) Months since 62 nd birthday

Late Retiree Sample: Claiming by those not retired by age % claim in first year of eligibility 62.2% claim by third year Significant effects of survival expectations when corrected for measurement error Months since 62 nd birthday N=1801 Age 65 spike

Correcting for Measurement Errors Probabilistic beliefs about survival in HRS (On a scale from 0 to 100) What are the chances that you will live to be age 75 or more? Measurement error: rounding and heaping at ‘50’ and ‘100’ Use Instrumental Variable methods to correct for measurement error Four sets of instruments: (I)Basic demographic characteristics (II)Health variables (self-reported health and conditions) (III)Dummy variables on parental mortality (own and spouse) (IV)Optimism index

Heterogeneity of Survival Beliefs and Measurement Error Survey measure of survival beliefs are quite noisy –many focal answers at “0”, “50” and “100” Subjective Probability of Survival to Age 75

Heterogeneity of Survival Beliefs and Measurement Error (cont.) But there is a lot of individual variability in subjective mortality risk based on risk factors (see Table 5) Predicted Subjective Survival Probability

The effects of subjective survival expectations on claiming behavior Bivariate probit model with demographics, health and wealth variables Claim by 64 specification Without correctionWith Correction Coef.P valueCoef.P value Subjective Prob IV Subjective Prob Effect of subjective survivals on claiming IV subjective prob. of surviving until age 75 Predicted probability of claiming by age correction for measurement error increases magnitude of effect by eight-fold instrumented coefficient is highly significant based on boot-strapped standard errors

The effects of subjective survival expectations on claiming behavior Bivariate probit model with demographics, health and wealth variables Claim by 64 specification Without correctionWith Correction Coef.P valueCoef.P value Subjective Prob IV Subjective Prob Effect of subjective survival probability on claiming IV subjective prob. of surviving until age 75 Predicted probability of claiming by age

The effects of objective survival expectations on claiming behavior Use data on 8 to 12 years actual mortality to estimate and “objective” probability of survival to age 75 using same variables as for IV Bivariate probit model Claim by 64 Specification Coef.P value Coef.P valueCoef.P value IV Subjective Prob Objective probability Subj – Obj probability Similar effects of subjective and objective expectations on SS claiming Objective expectations do not contain more information than subjective survivals to explain SS claiming

Conclusion Measurement errors in subjective probability are important Mortality expectations have significant effect on SS claiming People who expect to be long-lived delay claiming and enjoy larger benefits –Positive effect for the well-being of the elderly –Higher cost for tax payers –Ambiguous welfare effects on the whole population