No wonder there is such wide disagreement about the optimal age to start receiving Social Security.
The seemingly trivial differences in the way you ask the question lead to dramatically different answers. You’ll get an answer if you frame the problem in terms of how long future retirees must live before making up for the income they lose by not claiming their Social Security benefits at age 62. And you get a very different one if you frame the problem in terms of how much less your monthly payment will be if you start receiving benefits before you reach the maximum retirement age of 70.
These two ways of framing the problem are just two sides of the same coin, so if we were completely rational economic actors, as economists like to assume, our answers would be the same regardless of how the question is asked.
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 those choices are framed.
An economist who has extensively studied the architecture of choice is Dan Ariely, professor of psychology and behavioral economics at Duke University. It goes so far as to argue that our decisions are often made for us, as the way elections are framed may have a greater impact on our responses than the thought process we go through to find those answers. (Click here for one of Ariely’s TED talks on the subject.)
So while we believe that we are objectively analyzing the pros and cons of the options given to us, in fact we are being unconsciously driven towards one option or another simply because of how those options are framed.
Jeffrey Brown (dean of the University of Illinois School of Business in Urbana-Champaign and director of the Retirement Research Center of the National Bureau of Economic Research) studied the impact of architecture of choice on the claim decision of the Social Security. , Arie Kapteyn (professor of economics at the University of Southern California) and Olivia Mitchell (who holds two professorships at the Wharton School of the University of Pennsylvania: Business Economics and Public Policy, and Insurance and Risk Management).
To understand their findings, it’s worth remembering that the Social Security Administration (SSA) has established that the magnitude of Social Security benefits is actuarially equivalent, regardless of when you decide to start receiving benefits. If you claim your benefits at age 62, the first year you are eligible, you will receive payments for a longer period of time but at a reduced rate. If you instead claim age 70, the age at which you should begin receiving benefits, your monthly payments will be proportionally higher.
The net effect is that if you live as long as what is shown in the SSA actuarial tables as your life expectancy, the inflation-adjusted value of your lifetime benefits will be more or less the same regardless of when you start to claim benefits. That means there is a limit to the benefit you get from dividing and dividing numbers.
For their study, the teachers surveyed several thousand prospective retirees about the age at which they intended to claim their Social Security benefits, slightly altering the way the question was asked. Those small differences had a big impact.
Consider two of the ways that teachers posed the survey question:
• The first began by reporting how much the monthly benefit would be if the respondent decided to start receiving benefits at age 62. He then reported the impact of delaying this claim decision, stating how many years he would need to live before receiving the same life. Social Security benefits he would otherwise have received if he did not delay.
– Specifically, this first way of asking the question said: “If you delay in claiming, 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 [These dollar amounts were current at the time the Survey was conducted.]
• The second simply reported what the respondent’s monthly payment would be at each possible age at which benefits could be claimed. It did not frame these payment amounts as more or less than those associated with another claim age, but only the gross amounts themselves.
– Specifically, this second way of asking the question says: “Suppose you claim your benefit at age 66. In this case you will receive $ 2,065 each month … If you claim a year earlier, at age 65, your benefit would be $ 1,927 a month. If you claim a year later, at age 67, your benefit would be $ 2,230 a month. “
Note that compared to the second, the first way to ask the question frames the decision as a risky bet on your life expectancy. Since we don’t like to make risky bets with our withdrawals, it should come as no surprise that this way of asking the question leads people to an earlier age of claim. And that is precisely what the teachers found: respondents who had their choice framed in the first way chose an earlier claim age, 15 months earlier, on average. That was statistically very significant.
Also note that these are just two of the ways that teachers made seemingly slight changes to their survey question. Each of the eight additional changes they analyzed also had an impact on the average age of respondents.
There is a lot of irony here. Think back to all the ink that has been spilled over the years in an attempt to find the right answer for when you should start receiving Social Security, only to find 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 know the potential impact of how a question is framed. Specifically for when to claim Social Security, the implication is to examine the question from each of the many different angles. A good place to start is by asking the 10 different questions that the teachers posed in their surveys.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment bulletins that pay a flat fee to be audited. Hulbert can be contacted at [email protected].