Delaying Social Security
A view from the front
SIEPR Conference, October 8,2015
Jason Scott
Financial Engines, Inc.
Background
• Financial Engines
• Manages ~$110 Billion in retirement assets
• For ~890,000 clients
• Median 60-65 year old has $100,000+ (Most can delay)
• August 2014 released Social Security Planner
• Free, available to public (Demo if time permits)
• Thousands of advisor Social Security calls
• Delay is near universal recommendation.
• What reasons are given for early claiming?
• Could they justify an early benefit claim?
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NPV Calculation
120−𝑎𝑔𝑒
𝑁𝑃𝑉 =
𝑡=0
St
Ct
r
𝑆𝑡 ∗ 𝐶𝑡
1+𝑟 𝑡
Survival probability to time t
Cash flow at time t
Interest rate (real)
3
Sample Analysis Assumptions
St
Ct
r
Female, Age 66, IRS mortality
$24,000 @ 66 or $25,920 @ 67
1%
Benefit for 1 year delay?
+$10,700 NPV (expected lifetime benefit)
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Reason #1 Health / Longevity
• “Current health and family longevity are key in
the decision to claim. People assess their health
and family longevity and use this information to
determine the best time to file.”
• How big a mortality change is required?
• 2.5 mortality multiplier (very poor mortality pool)
• 3.2% annual mortality increase (known affliction?)
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Reason #2 Debt Repayment
• “For people who work beyond their full
retirement age…People with credit card
balances or mortgage balances see their Social
Security benefits as a significant income that
can be used to pay off this debt.”
• Q: What debt interest rate is necessary for
paying off debt 1 year early to be NPV>0?
• A: 48%!
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Reason #3 Faith in Social Security
• “Some people doubt the availability of their
Social Security benefits in the future. They
believe that if they don’t take it as soon as
possible, it might not be available for them later.
They have a “lock it in now” mentality.”
• Where would people get this concern?
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Reason #3 Faith in Social Security
Social Security statement disclaimer:
2033
77 percent of scheduled benefits
• (Only bold on page outside of headings)
• What does this do to the NPV?
• $10,700  $8,400
• What if change occurred in 2016?
• $10,700  $2,800
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Reason #4 Retirement == Social Security
• “A majority of people consider the decision to
retire synonymous with the decision to claim
Social Security benefits; these two ideas are
married in their minds. With many nearretirees, the concept of claiming Social Security
benefits at a different age than retirement age is
foreign.”
• How hard/costly is it to change an expectation
that has been developed over decades?
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Reason #4a Pension Integration
• “Many defined benefit pensions can be
integrated with Social Security benefits…
essentially retirees coordinate their retirement
income between their pensions and Social
Security benefits.”
• Integrated plans can offset 50% of Social Security benefit
• When you retire you need to claim in order to feel like you are
getting your “full pension”
• NOTE: Deferring Social Security generally does
not impact the DB calculation
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Reason #5 Liquidity constraints – Health Care Costs
• “For those people that retire earlier than 65,
healthcare costs are of high importance. Social
Security benefits can help pay for healthcare
costs before Medicare kicks in at 65.”
• Liquidity constraints could generally make early
claiming required
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Reason #5a Liquidity constraints – Insufficient assets
• “For many, Social Security benefits can make up
the bulk of, if not their entire, retirement
income. These people usually only consider
taking their benefits when they stop working
because they can’t afford to stop working if they
don’t have Social Security benefits.”
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Reason #6 Discounting
120−𝑎𝑔𝑒
𝑁𝑃𝑉 =
𝑡=0
𝑆𝑡 ∗ 𝐶𝑡
1+𝑟 𝑡
• Difficult calculation for people
• No doubt people would take highest cashout.
• Can’t use Social Security as collateral
• Limits flexibility
• Is NPV appropriate??
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Reason #6 Discounting
120−𝑎𝑔𝑒
𝑈𝑡𝑖𝑙𝑖𝑡𝑦 ? = 𝐶0 +
𝑡=1
d
b
𝛽 ∗ 𝑆𝑡 ∗ 𝐶𝑡
1+𝛿 𝑡
Subjective time discount
“Hyperbolic” discount factor
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Reason #6 Discounting
• Claim early if:
d > 4.45%; OR
b < .69
Parameter estimates: Harris and Laibson (2002)1
d = 4.49%; AND
b = .7
1Harris CJ,
Laibson D. Hyperbolic Discounting and Consumption. In: Advances in Economics and Econometrics:
Theory and Applications, Volume 1. Eighth World Congress; 2002 p. 258-298
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Summary
Reason
Justify Early Claiming?
Poor health
If very sick
Payoff debt
Very unlikely (48%)
Faith in payouts
No
Social Security == Retirement
?
Liquidity constraints
Yes
Time / Hyperbolic Discount
Yes / Yes
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Summary of the Summary
Why do people claim early?
It is complicated!
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Appendix
Social Security Planner Demo
FE Social Security Planner
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FE Social Security Planner
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FE Social Security Planner
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FE Social Security Planner
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FE Social Security Planner
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FE Social Security Planner
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FE Social Security Planner
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