“Probabilistic Thinking and Early Social Security

Claiming”by Adeline Delavande,

Michael Perry, and Robert Willis

Courtney CoileWellesley College

RRC Conference, August 2006

Overview While SS is roughly actuarially fair for typical worker,

those with longer-than-average life expectancies can increase lifetime SS benefits by delaying claiming.

Authors’ central question: do subjective survival probabilities affect claiming behavior?

Why this is an interesting question: Provides a test of forward-looking, rational choice

models. Provides insight into claiming behavior. If subjective survival probabilities affect claiming,

may affect other economic decisions.

Overview (con’t) Earlier paper (Hurd, Smith, and Zissimoupolous, 2004)

looks at same question and finds essentially no effect.

But true subjective survival probabilities are measured with error because of focal responses (~1/2 say 50% or 100%). Authors correct with instrumental variables.

Results: For those working at 62, a higher probability of living

to 75 retire later and claim later. For those retired before 62, however, there is no

effect of survival probabilities on claiming.

My Remarks Evidence on delayed claiming (how many people delay

claiming after retiring, for how long?).

Specific questions and suggestions about empirical analysis.

Broader implications of paper’s results.

Fraction of Early Retirees Who Have Not Claimed, by Months After 62nd Birthday

Sample from New Beneficiary Survey

0.03

0.19

0.09

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Fraction of Later Retirees Who Have Not Claimed, by Months After Retirement

Sample from New Beneficiary Survey

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

-1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Age 62 Age 63 Age 64 Age 65 Age 66+

Delayed Claiming: Evidence and Implications Very few workers delay claiming after age 62 (for early

retirees) or after retirement (for later retirees).

Implications for this study and beyond: Analysis of early retirees: authors find no effect, but

maybe this is because so few workers delay (though Coile et. al., 2002, find an effect of ex-post mortality).

Analysis of later retirees: do find an effect using bivariate probit. Since claiming and retirement seem to occur simultaneously, may want to use a simple probit.

For future research: low incidence of claiming delays is a puzzle -- is this due to liquidity constraints, myopia?

IV Strategy A good instrumental variable will be:

Correlated with subjective survival probability. Otherwise uncorrelated with retirement or claiming.

Instrumental variables used: Parental mortality -- clearly meets criteria. “Optimism index” -- highly significant in 1st stage,

but is this person-specific fixed effect excludable? Health -- may be excludable from claiming

regression, but not retirement. Demographics -- also in 2nd stage.

Other Questions / Suggestions Questions:

How can AHEAD cohort (born 1890-1923) be used in analysis? Why are health variables insignificant in retirement reg? Why not include years to age 75 in 1st stage regression?

Why not include other determinants of gain from delaying in 2nd stage?

Suggestions: Interact survival probability with education, measures of

cognitive ability, or whether people plan – finer test of rational choice.

Look for non-linear effect of survival probability (are financial/utility gains from delay linear in survival probability?).

Broader Implications Effects of claiming on SS trust fund

Authors point out that both long-lived workers claiming later and short-lived workers claiming earlier is bad for SS finances (and good for worker well-being). But how big are these effects?

Effect of claiming on redistribution Recent literature has established that SS may not be

as redistributive as previously thought, in part due to differential mortality. What effect does “strategic claiming” have on redistribution?

Conclusion Paper’s contribution: show that when correct for

measurement error, subjective mortality probabilities matter for retirement and claiming decisions (at least for those retiring after 62).

Future work exploring their effect on other decisions would be worthwhile.