Why are U.S. Households Claiming Social Security Later?

Abstract

Over the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased. At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased. In theory, all of these changes could lead to a trend towards later claiming. Disentangling the effect of any one change is difficult because they have been occurring simultaneously. This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931-1941 birth years) of the Health and Retirement Study (HRS). The predicted behavior is then compared to the actual retirements of the Early Baby Boomer cohort (1948-1953 birth years) to see how much of the later cohort's delayed claiming and retirement can be explained by these changes. This paper found that: • The Early Baby Boomer cohort was less likely to be fully retired than the HRS cohort at both age 62 (36.7 percent vs. 44.0 percent) and age 64 (49.5 percent vs. 53.9 percent). • The model suggests that the shift from DB towards DC plans was the biggest contributor to these declines, followed by better health. • Changes to Social Security rules and improvements in mortality played smaller roles. • Taken together, the four changes explain about 60 percent of the drop in full retirement at 62-the remaining could be due to changes in preferences or other changes not simulated like the rising cost of health care. The policy implications of this paper are: • As DB plans continue to fade in the private-sector, claiming will likely be further delayed. • If health continues to improve, claiming could be moderately delayed. • The resumption of the increase in the Full Retirement Age is not likely to lead to substantial delays in claiming.

The Behavioral and Consumption Effects of Social Security Changes

“…Because the goal of this paper is to predict how people are likely to respond to policy changes that have not yet occurred, it is useful to know if the model can accurately predict their responses to changes that occurred between the time the model was estimated and today. An analysis in Hou et al (2017) using the Gustman and Steinmeier (2006) model yields an encouraging result. In that paper, the authors looked at how much of the change in behavior between the HRS Cohort and the Early Baby Boomer Cohort (born roughly 12 years later) could be explained by four major changes that played out over that time: 1) changes in Social Security rules; 2) changes in pension structure; 3) improvements in health; and 4) improvements in mortality.…”

“…A logical question is whether the behavioral effects will differ greatly in today's world, when workers are more likely to rely on DC pensions and remain in better health longer. After all, Hou et al (2017) found that increases in DC coverage and improvements in health explained a large portion of the reduction in retirement seen by the Early Boomer cohort relative to the original HRS cohort. To examine this issue, the paper assigned health and pension characteristics consistent with the Early Boomer cohort to members of the model's sample and examined how they would respond to an increase in the FRA to 69 (the policy change with the largest behavioral effect).…”

How Will Retirement Saving Change By 2050? Prospects for the Millennial Generation

“…Kotlikoff and Wise (1984);Stock and Wise (1990).27 Hou et al (2017);Morisi (2016);Munnell (2015). The rise in the average retirement age is also consistent with the gradual increase in the full retirement age in Social Security that was enacted in 1983(Song and Manchester 2007) and more generally with the evolution of retirement incentives embedded in social security and private retirement plans(Coile 2018).…”