Most people sign up for Social Security benefits as soon as they're eligible—at age 62 or some other age prior to their full retirement age—despite the fact that doing so can actually cost them quite a bit of money because of reduced monthly benefits.

But according to a new research paper from the Center for Retirement Research at Boston College, that behavior—which the authors compare to failing to purchase additional annuity income—can be changed.

The behavior of claiming Social Security benefits early, the authors write, “is consistent with the so-called annuity puzzle.” The puzzle, roughly summarized, is that people don't do what they should do — that is, economic theory predicts people will annuitize wealth, but they don't in real life.

The “price” of boosting the amount of that annuity is, they say, “equal to one year of the foregone benefits,” one year for each year claiming is delayed.

And most people don't do that. They don't do it with private annuities, either, thanks to such “market frictions as adverse selection and the existence of minimum purchase requirements.”

But those can't really be the reasons people choose not to hold off on claiming benefits so that they can increase a public annuity, and the study sought to find out why.

Considering such factors that weigh on the purchase of private annuities as uncertain medical expenses, bequest motives, means-tested benefits and pre-annuitized wealth, they write, in their model the study subject faces “a key trade-off in this decision”: whether to take “an immediate increase in the available resources” or wait for “a higher lifetime pension income starting one year later.”

The choice depends on how much future benefits will increase; available resources; anticipated spending on health care and longevity; how strongly they feel about bequests; and what their time preferences are.

If people were more patient (could wait for that higher monthly rate), and/or “if the Social Security annuity was 'priced' based on a higher implied interest rate,” considerably more of them would opt for delaying claims.

In addition, the report finds, “if the amount of basic Social Security benefits is scaled down or if the strength of the bequest motive is diminished, significantly more” will postpone claiming benefits.

The study concludes that rewarding people with lump-sum payments rather than higher monthly benefits for delaying claims would be “very effective” in convincing people to delay claiming.

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Early Social Security claiming behavior can be changed, study says

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