Begin Social Security Benefits for the Right Reasons

Study shows that many seniors have likely been misled into claiming benefits too early.

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We've been framed, at least when it comes to deciding when to begin taking Social Security benefits. According to new behavioral economics research, the way seniors are presented with information about Social Security benefits has a big impact on their decision. Further, it found, generations of retired workers may have claimed benefits too soon based on the long-standing way many experts described the claiming decision.

Even when researchers took pains to make sure the information on specific benefits was the same, the way that information was presented—or framed, to use the research term—greatly influenced claiming times.

[See 10 Ways to Boost Your Social Security Checks.]

Under current rules, people with at least 40 quarters of employment earnings are entitled to Social Security retirement benefits. The earliest benefits can be received is age 62. Each year thereafter that benefits are delayed, the amount of benefits increases by roughly 8 percent a year. At age 70, no further benefit increases are earned, so there's no reason to delay benefits after that age.

Based on the expected longevity of the entire population, the age at which people begin claiming Social Security benefits has a neutral financial impact on the program. People who claim early will, on average, get no more benefits over their lifetimes than people who wait until their later years to begin claiming benefits.

However, what's true for everyone is not true for individuals. Financial, employment, family, and health factors influence individuals in their decisions on when to begin taking Social Security. It may make good sense for an individual to claim at any point during the eight-year claiming window, depending on these variables.

Now, it appears, the way in which the claiming decision is communicated should be added to the list of important elements that can shape the time at which people begin claiming benefits. The study, "Framing Effects and Expected Social Security Claiming Behavior," was done by academics Jeffrey R. Brown (University of Illinois at Urbana-Champaign), Arie Kapteyn (RAND Corp.), and Olivia S. Mitchell (the Wharton School at the University of Pennsylvania). Their work is connected to the growing body of behavioral research proving that personal decisions are shaped in powerful ways not only by information, but also by the way that information is presented.

[See 4 Fixes for Behavioral Investing Mistakes.]

"Our study indicates that the Social Security Administration (SSA), as well as other public or private sector actors, can present information to participants in ways that can strongly influence behavior—even when the actual information content is unchanged," they wrote. "This is particularly relevant for an agency such as the SSA that prides itself on providing relevant information without providing advice."

The researchers tested different behavioral framing concepts in consumer interviews. They found that framing the decision in terms of gains or losses led to different consumer choices. For example, the decision to take benefits early could be described as "gaining benefit dollars" or "losing future dollars." Likewise, the decision to defer benefits to a later age could be couched as either a gain via higher benefit payments or a loss of benefits that were not received in earlier years.

The study also found that it makes a difference whether the benefit discussion is framed around making the decision at an earlier or later claiming age—what researches called an "anchoring" age effect—during the eight-year time span covering the possible claiming ages of 62 to 70. For example, seniors could be asked to consider taking benefits at age 62 and then evaluate the impact over their later years. Or they could be asked to consider delaying benefits until age 66 or even later, and then consider that impact.

Consumers were broken into 10 framing groups and each group was asked to indicate when it would begin taking Social Security based on information framed in 10 different ways. These included a baseline approach that was totally value neutral, and which reflects the approach now used by the Social Security Administration. It also included a "breakeven" approach that looked at how many years it would take a later claimant to make up for the funds he or she would have collected if benefits had started at age 62. The other eight approaches used combinations of three framing approaches—gain versus loss, age anchoring, and describing the decision as either an investment or a consumption decision affecting future income and spending abilities.

[See 8 Ways to Manage a Longer Life.]

"Presentation of gains leads to later claiming than losses," the researchers said. "We also find evidence of an 'anchoring' effect with regard to age ... Presenting respondents with a consumption gain frame anchored at age 66 yields the highest claiming age."

The most surprising finding, however, was that the breakeven analysis of the claiming decision drove people to claim benefits at far earlier ages than the other nine frames—12 to 15 months earlier than the neutral baseline question.

"This [breakeven] approach essentially frames the decision as a risky gamble while downplaying insurance aspects of the choice," the study said. Further, it is an approach "consistent with how Social Security field representatives presented this choice to potential claimants for many decades (at least until 2008 when they switched to a more neutral frame). This approach is also widely used in the private sector financial advice and planning industry."

"Social Security's historical emphasis on 'breakeven analysis' may have inadvertently encouraged several generations of American workers to claim benefits earlier than they would have otherwise, had the information been presented in a different frame."

Twitter: @PhilMoeller