The Financial Feasibility of Delaying Social Security Gopi Shah Goda Shanthi Ramnath John B. Shoven Sita Nataraj Slavov SIEPR/Sloan Working Longer Conference October 8-9, 2015

When to claim Social Security? Delay equivalent to buying annuity.

Result: Deferring Social Security is Actuarially Advantageous Deferring is a … – good deal for single men in average health – better deal for single women in average health – so-so deal for the lower earner in a couple – very good deal for the higher earner in a couple Gains from delay increased substantially for 1938 birth cohort onwards: – Rule changes – Mortality improvements – Historically low interest rates Possible to separate retirement and claiming decisions through use of retirement savings

Actual Claiming Decisions Source: Health and Retirement Study, Shoven and Slavov (2012), includes only individuals not working at time of claim

Why don’t individuals delay? Many possible explanations: – Lack of liquidity or ability to borrow – Private information about mortality – Impatience – Fear that SS will be reformed and benefits will be reduced – Do not value the marginal increase in Social Security annuity from deferring (Fitzpatrick 2014) – Claim at FRA (Behaghel and Blau, AEJ 2012) We explore the first two

IRS Data 1940 birth cohort – Observed from (ages 59-71) – IRA balances and withdrawals from 5498 and 1099-R (aggregate by household) – Social Security claim year from 1099-SSA – Wages from W-2 and self employment Focus on primary earners claiming retired worker benefits: – Drop those receiving disability at any point – Drop married women – Drop those claiming before age 62 Sample of ~1.1 million

Methodology Examine first year of IRA distribution versus first year of SS claim – Liquidity constraints  withdraw from IRA as soon as possible Examine ratio of IRA balances to average Social Security benefit by gender/claim age – Lower bound on feasible length of delay Examine mortality of early versus late claimers.

First Year of Social Security Claim

First Year of Distribution from Traditional IRA

Difference between Social Security Claim Year and First Year of IRA Distribution

Percent of Households with IRA Fair Market Value Greater than Two or Four Years of Social Security Benefits

Mortality Hazards by Social Security Claiming Age

HRS: Data Panel survey representative of 50+ population Sample: Primary earners ~ age 62 who are observed through normal retirement age Birth cohorts Focus on primary earners claiming retired worker benefits: – Drop those receiving disability/SSI – Drop married women – Drop those with less than 10 years of work – Drop if claim before age 62 Household wealth: IRAs, defined contribution pensions, and non-retirement financial assets.

Methodology Compare claiming behavior among those with high versus low wealth Compare characteristics of early (before normal retirement age) versus late (after normal retirement age) claimers

Summary Statistics: Claiming and Wealth

Percent Claiming Early by Wealth and Birth Cohort

Summary Statistics: Individual Characteristics

Relationship Between Early Claiming and Individual Characteristics

Conclusions Individuals claim Social Security before taking distributions from IRAs Significant share of individuals has sufficient wealth to delay Social Security by 2-4 years Early claimers have higher actual and subjective mortality, and report worse health