Don't Get 'Framed' When Claiming Social Security

The way benefits are described can lead people to make the wrong decision about when to begin claims.

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We've been framed, at least when it comes to deciding when to begin taking Social Security benefits. According to behavioral economics research, the way seniors are presented with information about Social Security benefits has a big impact on their decision.

A 2013 study, "Framing and Claiming: How Information-Framing Affects Expected Social Security Claiming Behavior," by academics Jeffrey Brown of the University of Illinois at Urbana-Champaign, Arie Kapteyn of the University of Southern California and Olivia Mitchell of the Wharton School at the University of Pennsylvania 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 information was presented – or framed, to use the research term – greatly influenced claiming ages.

"Our evidence strongly suggests that how the claiming information is framed powerfully influences peoples' anticipated claiming dates," they wrote in the study, which will be published in an upcoming edition of the Journal of Risk and Insurance.

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 taking 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 when to begin taking Social Security. It may make sense for an individual to claim Social Security at any point during the eight-year claiming window, depending on these variables.

Now, the way the claiming decision is communicated should be added to the list of important elements that can shape the time when people begin claiming benefits. In the claiming behavior study, 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 the researchers 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.

Consumer choices included a baseline approach that was value neutral – the communication approach now favored by the Social Security Administration. It also included a Social Security "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. Other 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.

A presentation of gains leads to later claiming than losses, the researchers said. They also found that anchoring the decision at age 66 yielded the highest claiming age. For current retirees, 66 is considered the "full retirement age" under Social Security rules, entitling recipients to certain program benefits not open to younger claimants.

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 framing approaches – 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," the paper noted. "Social Security benefits represent at least half of income for 65 percent of beneficiaries. Clearly, then, the claiming decision has substantial consequences for the financial well-being of a large part of the U.S. elderly population."

The researchers concluded that the ease of influencing a claiming decision by a change of framing is a concern.

"It implies that many individuals may be insufficiently equipped to make a decision that affects their financial well-being in their later lives," they wrote. "We have found that the financially less literate, individuals with credit card debt and those with lower earnings are more influenced by framing than others. These are also the groups that are most financially vulnerable at older ages."

Twitter: @PhilMoeller