Delaying Social Security A view from the front SIEPR Conference, October 8,2015 Jason Scott Financial Engines, Inc.

Background 2 Financial Engines Manages ~$110 Billion in retirement assets For ~890,000 clients Median year old has $100,000+ (Most can delay) August 2014 released Social Security Planner Free, available to public (Demo if time permits) Thousands of advisor Social Security calls Delay is near universal recommendation. What reasons are given for early claiming? Could they justify an early benefit claim?

NPV Calculation 3 S t Survival probability to time t C t Cash flow at time t rInterest rate (real)

Sample Analysis Assumptions 4 S t Female, Age 66, IRS mortality C t 66 or 67 r1% Benefit for 1 year delay? +$10,700 NPV (expected lifetime benefit)

Reason #1 Health / Longevity 5 “Current health and family longevity are key in the decision to claim. People assess their health and family longevity and use this information to determine the best time to file.” How big a mortality change is required? 2.5 mortality multiplier (very poor mortality pool) 3.2% annual mortality increase (known affliction?)

Reason #2 Debt Repayment 6 “For people who work beyond their full retirement age…People with credit card balances or mortgage balances see their Social Security benefits as a significant income that can be used to pay off this debt.” Q: What debt interest rate is necessary for paying off debt 1 year early to be NPV>0? A: 48%!

Reason #3 Faith in Social Security 7 “Some people doubt the availability of their Social Security benefits in the future. They believe that if they don’t take it as soon as possible, it might not be available for them later. They have a “lock it in now” mentality.” Where would people get this concern?

Reason #3 Faith in Social Security 8 Social Security statement disclaimer: (Only bold on page outside of headings) What does this do to the NPV? $10,700  $8,400 What if change occurred in 2016? $10,700  $2, percent of scheduled benefits

Reason #4 Retirement == Social Security 9 “A majority of people consider the decision to retire synonymous with the decision to claim Social Security benefits; these two ideas are married in their minds. With many near- retirees, the concept of claiming Social Security benefits at a different age than retirement age is foreign.” How hard/costly is it to change an expectation that has been developed over decades?

Reason #4a Pension Integration 10 “Many defined benefit pensions can be integrated with Social Security benefits… essentially retirees coordinate their retirement income between their pensions and Social Security benefits.” Integrated plans can offset 50% of Social Security benefit When you retire you need to claim in order to feel like you are getting your “full pension” NOTE: Deferring Social Security generally does not impact the DB calculation

Reason #5 Liquidity constraints – Health Care Costs 11 “For those people that retire earlier than 65, healthcare costs are of high importance. Social Security benefits can help pay for healthcare costs before Medicare kicks in at 65.” Liquidity constraints could generally make early claiming required

Reason #5a Liquidity constraints – Insufficient assets 12 “For many, Social Security benefits can make up the bulk of, if not their entire, retirement income. These people usually only consider taking their benefits when they stop working because they can’t afford to stop working if they don’t have Social Security benefits.”

Reason #6 Discounting 13 Difficult calculation for people No doubt people would take highest cashout. Can’t use Social Security as collateral Limits flexibility Is NPV appropriate??

Reason #6 Discounting 14  Subjective time discount  “Hyperbolic” discount factor

Reason #6 Discounting 15 Claim early if:  >4.45%; OR  <.69 Parameter estimates: Harris and Laibson (2002) 1  =4.49%; AND  =.7 1 Harris CJ, Laibson D. Hyperbolic Discounting and Consumption. In: Advances in Economics and Econometrics: Theory and Applications, Volume 1. Eighth World Congress; 2002 p Hyperbolic Discounting and Consumption

Summary 16 ReasonJustify Early Claiming? Poor healthIf very sick Payoff debtVery unlikely (48%) Faith in payoutsNo Social Security == Retirement? Liquidity constraintsYes Time / Hyperbolic DiscountYes / Yes

Summary of the Summary 17 Why do people claim early? It is complicated!

Appendix Social Security Planner Demo

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