Social Security and Behavioral Economics

The future of Social Security for our retired citizens is currently a lightly heated debate among United States' leaders. The current plan as implemented is steadily declining because the cost of paying for retirees is getting higher than the budgeted taxes assigned to pay for the program. One idea to help the problem has been to raise the age at which citizens can receive Social Security benefits. This would increase the amount of years non-retired citizens have jobs and contribute to the growing economy. But, this plan comes at a high political cost between parties.

Currently the age to apply for Social Security stands at 62 years old and the amount to which one receives is based on financial history and claimed age. So, for example, once you turn 62 and apply for Social Security you can receive a check of $1,500 each month. In an average case, with each added year, an extra $100 is added to your Social Security check, so at the age of 63 you would receive $1,600 each month.

A study conducted by Mauer, Mitchell, Rogalla, and Schimetschek (2014) from the National Bureau of Economic Research found that people would rather have a different payment plan than the normal monthly payment plan.  In this alternative approach, a credited lump sum payment would be given to the future retirees if they continued working past the current 62 year age. The lump sum would equate to the amount that they normally would have received during the monthly payment plan. Using our example, if you worked till you were 63 years old, then applied for SS, you would receive a lump-sum check of $18,000. If you worked till 64, your lump sum check would be the 62 year rate plus the 63 which would equate to $37,200.

The researchers concluded that citizens would rather choose the credited lump sum payment plan and work longer OVER the monthly payment plan, even in which they retire earlier. The average age at which people took the alternative plan was 18 months after the age of 62 when they could apply for SS. While the government would still be paying retirees the same amount of money, the research shows that citizens would be willing to work past the current age, effectively raising the age of retirement and allowing those citizens to continue to work, keeping the tax base and growing the economy.

Will They Take the Money and Work? An Empirical Analysis of People's Willingness to Delay Claiming Social Security Benefits for a Lump Sum 

Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek

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