Olivia S. Mitchell (@OS_Mitchell) is a professor of business economics/policy and insurance/risk management at the Wharton School of the University of Pennsylvania, where she focuses on pensions, household finance, retirement, and risk management.  Global aging paired with pension shortfalls have led many governments to raise retirement ages and cut benefits. But this approach tends to be unpopular, as demonstrated by loud protests we’ve seen over the last few years from Greece and France to Detroit and, soon, Puerto Rico.  My recent research explores a different approach, one that would encourage people to delay claiming their benefits without forcing them to do so. Specifically, we suggest that replacing the current Social Security delayed retirement credit with a lump-sum payment would induce many people to voluntarily defer claiming their Social Security benefits, and many would work more.  To test whether our idea makes sense, we designed and implemented a survey using the American Life Panel (ALP), a nationally representative, probability-based U.S. panel of over 6,000 respondents ages 18 and older who are regularly interviewed over the Internet for research purposes. Our goal was to see how people might respond to delaying their Social Security benefit to, say, age 66 or later, and then getting their age-62 level benefit plus a lump sum that was equal to the benefit increase that they’d be entitled to by delaying claiming.  To illustrate, under current rules, Social Security retirement payments depend on each worker’s lifetime earnings and how old she is when she claims benefits. So we first showed each survey respondent how much her monthly benefit would be under current Social Security rules if she filed at 62, or waited until 63, 64 and so on to age 70. Then we asked about her expected claiming age.  Next we showed her our alternative and asked what her expected claiming age would be under the new setup. Specifically, we told her to assume she could delay claiming until some future age, get her age-62 Social Security benefit from that date onward, and at the same time receive a lump sum amounting to the present value of her delayed retirement credit. For instance, someone who would get a $1,500-per-month Social Security benefit from claiming at age 62, would instead receive $1,500/month plus $109,000 as a lump sum if she claimed at age 67. Delaying to age 70 would imply the same monthly benefit, $1,500/month, plus a lump sum of $178,000.  It’s important to note that this partial benefit buyout would not burden the system. That is, Social Security adjusts monthly benefits roughly in line with rising mortality, so the lump sum would equal the additional payments due to delayed claiming. (In this sense the partial buyout is actuarially fair.)  What we learned from our study is that many people would be willing to claim later and work longer, if they can get the attractive partial buyout from Social Security. Additionally, many who had initially stated that they wanted their benefit as young as possible, were also most willing to delay and work longer when offered the partial buyout.  This suggests that, given the right incentive, many early retirees would keep at it a little longer. And under our plan, all beneficiaries would still receive their early-retirement benefits in retirement, so they’d still have the inflation-indexed lifetime income streams so central to the Social Security promise.  Sadly, the candidates currently running for U.S. president have yet to offer viable ideas to bring Social Security’s finances back into balance. And as recently warned by the Committee for a Responsible Federal Budget, every year that passes makes it “more difficult to secure the Social Security programs for current and future generations with thoughtful changes instead of abrupt benefit cuts or tax increases.”  Our partial buyout approach is designed to be cost-neutral to the Social Security system, as the plan will raise no additional solvency concerns nor require wealth transfers from future to implement. Nevertheless, incentivizing longer work lives could lead to better mental and physical health at older ages for many people, so there could be ample positive social benefits.  Read the latest Investing in Funds & ETFs Report.
WSJ Wealth Management Expert Olivia Mitchell of the Wharton School discusses her research on how to encourage people to delay taking Social Security benefits without forcing them.