No wonder there is such disagreement about the optimal age at which to start receiving social security.
Apparently insignificant differences in the way you ask the question lead to radically different answers. You get an answer if you define the problem in terms of how long future retirees must live before catching up on the income they lose by not claiming their social security benefits at age 62. And you get another one if you set the question of how much their monthly payment will be lower if they start receiving benefits before reaching the maximum age of 70.
These two ways of formulating the question are of course only the flip side of the same coin, so if we were fully rational economic actors, as economists like to assume, our answers would be the same regardless of how the question is formulated.
But it goes without saying that we are not entirely rational.
Welcome to the growing field of behavioral economics known as “architecture of choice”. It focuses on the impact on our choices of the different ways in which these choices are made.
One economist who has thoroughly studied the architecture of choice is Dan Ariely, professor of psychology and behavioral economics at Duke University. It goes so far as to say that our decisions are often made for us, because the way in which the choices are formulated can have a greater impact on our responses than the process of reflection that we go through to arrive at these responses. (Click here for one of Ariely’s TED conferences on the subject.)
So while we think we are objectively analyzing the pros and cons of the choices we are given, we are in fact subconsciously led to one choice or another simply because of the way these choices are formulated.
The impact of the architecture of choice on the social security claim decision was studied several years ago by Jeffrey Brown (dean of the College of Business at the University of Illinois at Urbana-Champaign and director of the Retirement Research Center of the National Bureau of Economic Research), Arie Kapteyn (professor of economics at the University of Southern California) and Olivia Mitchell (holder of two chairs at the Wharton School of the University of Pennsylvania: business economics and public policy and insurance and risk management).
To understand their conclusions, it should be remembered that the Social Security Administration (SSA) defined the extent of social security benefits to be actuarially equivalent, no matter when you decide to start receiving benefits. If you apply for benefits at age 62, the first year in which you qualify, you will receive payments over a longer period of time, but at a reduced rate. If you ask at age 70, the age at which you should start receiving benefits, your monthly payments will be proportionately higher.
The net effect is that if you live as long as what is stated in the SSA actuarial tables is your life expectancy, the inflation-adjusted value of your lifetime benefits will be more or less the same. no matter when you start claiming benefits. This means there is a limit to the benefits you get from cutting out and cutting out numbers.
For their study, the professors questioned several thousand future retirees on the age at which they intended to claim their social security benefits, slightly modifying the way the question was asked. These slight differences had a huge impact.
Consider two of the ways teachers asked the survey question:
• The first started by declaring the amount of the monthly benefit if the respondent chose to start receiving benefits at the age of 62. He then reported on the impact of postponing this application decision, indicating how many years it would take him to live before receiving the same lifespan Social Security benefits that he otherwise received by not delaying.
– More precisely, this first way of asking the question read as follows: “If you delay the request, your monthly benefit will increase. For example, if you claim your benefits at age 63 (one year later), your benefit will increase by $ 103 per month … However, by delaying your benefit by one year, you will lose the $ 18,588 that you would have received between 62 and 63. According to our calculations, you would have to live at least 15 more years to recover the $ 18,588 that you lost by waiting a year. ” [These dollar amounts were current at the time the Survey was conducted.]
• The second simply indicated what the respondent’s monthly payment would be at each possible age at which benefits could be claimed. He did not present these payment amounts as being more or less than those associated with another age, but only the gross amounts themselves.
– More precisely, this second way of asking the question read as follows: “Suppose you claim your benefit at age 66. In this case, you will receive $ 2,065 per month … If you ask a year earlier, at age 65, your benefit would be $ 1,927 a month. If you apply a year later, at age 67, your benefit would be $ 2,230 per month. “
Note that, compared to the second, the first way of asking the question frames the decision as a risky bet on your life expectancy. Since we don’t like taking risky bets with our pensions, it should come as no surprise that this way of asking the question leads people to an earlier claim age. And this is precisely what the professors found: the respondents who had made their choice initially chose an earlier claim age – 15 months earlier, on average. It was statistically very important.
Also note that these are just two of the ways teachers have made slight changes to their survey question. Each of the other eight changes they analyzed also had an impact on the average age of respondents’ request.
There is a lot of irony here. Think of all the ink that has been spilled over the years in trying to find the right answer as to when you should start receiving social security – only to find out that the answers were predetermined by seemingly benign differences in how questions were asked first.
The general implication of this research is the need to be aware of the potential impact of the way a question is formulated. Specifically, knowing when to apply for social security involves looking at the issue from different angles. A good starting point is to ask the 10 different questions that teachers have asked in their surveys.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert valuation follows investment bulletins that pay fixed costs to be audited. Hulbert can be contacted at [email protected].