9/6/17Paper: Decision to claim Social Security benefits influenced by ‘framing’
CONTACT: Phil Ciciora, Business & Law editor, 217-333-2177
CHAMPAIGN, Ill. — With Social Security benefits representing at least half of the retirement income for 65 percent of beneficiaries, the decision to claim benefits early or later is one that’s fraught with substantial financial consequences for the elderly. And according to research co-written by a University of Illinois expert who studies the intersection of retirement issues and public policy, the decision to claim benefits can be easily influenced by changing how the repercussions of the decision itself are communicated.
Results show retirees are more likely to delay claiming benefits by as many as 15 months due to how the decision is “framed” to them, said Jeffrey R. Brown, the Josef and Margot Lakonishok Professor of Business and Dean of the College of Business at Illinois.
“You can provide people with the exact same information, but the way you share the information, or how you ‘frame’ the information, can actually lead people to make dramatically different choices,” Brown said.
Brown and co-authors tested how expected claiming ages varied according to the way in which benefits were described in 10 different frames – one frame that is consistent with how Social Security representatives presented the choice to potential claimants for many decades, one more neutrally worded frame, and eight experimental frames that described the decision as consumption versus investment; gain versus loss; and whether the information was “anchored” at earlier or later ages.
The results show that the experimental frames generated “economically and statistically significant differences in expected claiming ages,” according to the paper.
“What we found is that all of the alternate frames led people to choose a later claiming date than what Social Security was actually doing,” said Brown, a former member of the bipartisan Social Security Advisory Board and a senior economist with the President’s Council of Economic Advisers from 2001-02. “It mattered less whether it framed using consumption or investment language, or as a gain or loss – all of the alternative approaches led to later claiming relative to how the Social Security Administration has been communicating.”
Although individuals can claim Social Security benefits as early as age 62, they can also defer to as late as age 70. Monthly benefit levels are actuarially adjusted for the claiming age, and the adjustments can be “substantial,” Brown said.
An individual who stops working at age 62 but waits to claim benefits at age 70 will receive 76 percent more in real dollars per month in perpetuity than if they had claimed benefits at age 62, according to the paper.
“Even though these adjustments are designed to be approximately actuarially neutral, the age at which an individual claims benefits has important implications for income replacement rates, particularly for older people who may be physically incapable of returning to the workforce,” Brown said.
The results are concerning because if simple changes in framing can significantly affect behavior, this implies that many individuals may be insufficiently equipped to make a decision affecting their financial well-being in their later years, Brown said.
“One of the biggest risks people face is running out of money in retirement,” he said. “Social Security is a backstop against that. And yet almost everyone who claims Social Security claims it at the earliest possible age they can, which is inconsistent with what economic models suggest they ought to do.”
Additionally, the most financially vulnerable groups at older ages – the less financially literate, individuals with credit card debt, and those with lower earnings – are more influenced by framing effects than others.
“How sensitive people are to framing correlates to their level of financial sophistication,” Brown said. “People who are less numerate and less knowledgeable about finance are much more sensitive to framing effects than more financially savvy individuals. But even financially savvy individuals are not immune to framing.”
The reason the concept of framing is important is “if you think people are making perfectly rational and optimized decisions, then the way you frame it shouldn’t make any difference at all,” Brown said.
“The fact that framing affects decisions means that people do not meet an economist’s formal definition of being perfectly rational,” he said. “Therefore, we have to think a little harder about how we communicate these tough decisions to real individuals whose decision-making processes vary in interesting ways. And changing the way you communicate about this issue does not require a change in law. It’s just language that needs to be tweaked.”
Although it’s not optimal for everyone to claim Social Security benefits later than the earliest possible date they are eligible, for most retirees, it makes a lot of sense, Brown said.
“It is optimal for some people to claim early, especially those who have severe health concerns, are liquidity constrained or who have lost their job,” he said. “But for those in average or better health and who have enough resources to delay claiming, claiming benefits later is the most cost-effective way to generate a higher level of income that will last for life.”
With a much larger share of people’s lives being spent in retirement, the decision of when to retire can also have macroeconomic consequences.
“As a country, one of the best ways to ensure that retirees have sufficient resources is to extend working lives,” Brown said. “We do not want to require people to work longer, but we should definitely stop discouraging people from doing so. And the way the Social Security Administration has communicated about the effects of claiming age is one way we have been discouraging longer working lives.”
Brown’s co-authors are Arie Kapteyn, of the Center for Economic and Social Research at the University of Southern California, and Olivia S. Mitchell, of The Wharton School at the University of Pennsylvania.
The paper was recently awarded the Robert C. Witt award from the American Risk and Insurance Association for the best paper published last year in The Journal of Risk and Insurance.
A member of the TIAA Board of Trustees since 2009, Brown is the director of the Retirement Research Center of the National Bureau of Economic Research.
Editor’s notes: To contact Jeffrey R. Brown, call 217-333-2747; email email@example.com.
The paper “Framing and claiming: How information-framing affects expected Social Security claiming behavior” is available online.
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