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I want to welcome Olivia Mitchell to knowledge at Wharton she's a professor of business economics and public policy
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here at Wharton and she has some new research on Social Security which I think is going to present some novel
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ideas for us and it's being published right now as an issue brief by the Penn
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Wharton public policy initiative Olivia is a recognized expert on retirement and
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Social Security so I'm especially happy to have her talking about this topic um
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and it's great to have you back uh could you give us a summary of your research
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which is based on a survey as I understand it and it's also uh based around the idea that the social security
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funds will run out at some point soon um the 2032 34 uh areas is usually what people site and the most common
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solutions to this deficit in funding are that we either in increase retirement age or cut benefits or we increase taxes
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or lift the cap as they say um on incomes above which are not paying Social Security at the moment but
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apparently there's another solution out there which is revenue neutral which is
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good news because um the other uh suggested Solutions are very unpopular in different camps but your solution is
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revenue neutral why don't you tell us about it so around the world Social Security
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systems are running out of money we're not unique in the United States in that
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regard and the typical policy recommendations are not very popular like raising the retirement age or
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cutting benefits or raising taxes what we set out to do in our research is to try to think of a new way to get people
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to delay claiming work longer and have all that happen without Social Security suffering financially so nutshell what
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we set out to do was to design a way to give people their benefit increases that
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they would receive if they delayed claiming but instead of giving them their benefit increases as a monthly
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payment we would give it to them as a lump sum at their later claiming date the money turns out to be quite
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substantial from 60 to 80 to $170,000 this is the actu neutral value of the additional benefit and lo and
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behold people like this idea in our experimental survey what we found is that people would delay claiming about
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half a year and they would work about a third to a half of the extra time all of
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that takes place without costing the Social Security System a penny on net uh and so it's very interesting so
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the idea is that right now people could retire at 62 let's say say with partial
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benefits or 66 or 67 depending on when you were born with full benefits Social Security offers an
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incentive if you wait and don't claim on those dates so if you're 66 and you wait
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a year your benefits will go up by a certain amount roughly 8% I think and then if you wait another year they could
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go up another 8% the idea being continue working or at least don't start draining
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the funds and we will give you uh incentive to do that so apparently that's of limited interest to people so
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what you're finding is that your lump Su some solution is much more attractive to
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people and actually accomplishes the same thing or even better than what's being done now what we find is that
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today over a third of Americans claim their benefits from Social Security as early as they can which is age 62 and
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the modal claiming age is about 63 so most people give up on their increased benefits that they could get if they
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waited to the latest possible claiming age in our current scenario in our current uh system the latest possible
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claiming age is age 70 it's a little known fact that if you wait to claim from age 62 to 70 either keep working or
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live on other other assets that your benefits go up by 76% this is an enormous increase and
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probably a better investment if you will than what most people can make in the market today today
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exactly so um the problem however is that people don't understand annuities they don't understand benefit increases
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which will be paid the rest of their lives so what we try to do in our research is take advantage of the fact
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that people don't understand benefit increases the rest of their life and instead what we do is we say all right
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if you're someone who would earn let who would receive 1,500 a month from Social
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Security if you claimed at age 62 under our scenario we would still give you that 1,500 a month if you
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claimed let's say at age 66 but then all the benefit increase you had earned by
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delaying claiming would be given to you as a lump sum at that later claim date and what we find is that people like
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lump sums not surprisingly a bird in the hand seems more than worth more than two
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in the bush so is this is this related to the idea that some people there are people who make
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calculation if I wait until 70 I do get a lot more money but then I have to live
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to a certain age before that that amount of money is worth more than had I taken
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payments all along up until that that point so is this taking that into account also right the Social Security
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Administration computes the benefit increase that you get each year that you delay so that the increment is just
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enough to offset the fact that you're not taking it for a year so in a sense
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it's actually neutral it's actually Fair it doesn't hurt the Social Security
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System it doesn't save us save it any money but so in that sense what we proposed in our experiment was to give
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people the benefit that they would get already in expectation but converted into a lump sum now not surprisingly the
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people that are willing to do it are the people who were say they are somewhat debth constrained so they have debts
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that they owe and they would still get the basic benefit that they're owed but
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they the lump sum would help them solve their debt problems other people who find it very attractive are the
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financially literate people that understand that they're going to get money that would help them uh cover
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other expenses and still get their base benefit the rest of their lives so as part of the psychology for the consumer
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that um if I wait till 70 I have to live until I forget what the age is it's like
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84 or something before you know it sort of Nets out that I'm actually making a
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net gain over all those years but now I can sort of like change my mind anywhere
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along the way and I haven't given anything up I can I can just get this big lumpsum payment is that is that part
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of the psychology at work well unfortunately my research shows that a majority of financial advisers use this
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very flawed approach to advising on Social Security claiming which they call the break even approach and the break
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even approach is extremely misleading because they say to you you will have to live to some age say 84 for sure to get
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all the money back that you gave up by not claiming early that's a very flawed
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approach and um the reason that it is is that it ignores the fact that by delaying claiming the retiree gets a
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higher benefit for the rest of his life even if he he or she lives to be 125 years old so I would take is with the
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break even approach and I don't think it's an appropriate um way to frame the
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discussion okay um fair enough so um which of the conclusions if any surprised you from your research this is
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based on a survey yes so what we did was we fielded um a survey a nationally representative survey of older Americans
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and we asked them before we got started some questions about their lifetime earnings so we could figure out get a
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pretty good estimate of what their expected Social Security benefits would be at Future ages then we said under the
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status quo under the current system when do you expect the claim and they'd tell
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us and then we'd show them the alternative the lump sum option for example and we'd say given this set of
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opportunities when would you claim and not surprisingly the majority of people selected a later claiming age and we
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could then examine that delay in the claiming age and correlate it with attributes of the person answering the
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question and so one of the things that really surprised me was that we found that people who otherwise would have
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claimed very young at 62 were the most likely to be willing to delay claiming the reason that surprised me is
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is there's a common view that early retirees can't work anymore they're too
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sick they're too unable to find jobs but in fact this suggested there's a lot of
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give among the early retirees and if you give them an incentive to delay claiming
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they will delay and they'll work longer so if this idea this novel idea of lumpsum payment were adopted how would
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it change the finances that that you talk about in the paper where the money's going to run out uh or or at
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least largely run out uh onethird of the money is going to run out by 2032 well the Social Security trustees
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have projected that there will be only enough money to pay 2third of the benefits starting
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around uh 2032 which is getting closer as the years go by um so benefits would be projected to drop by a third for
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everyone the way we've designed our experiment we made it act neutral so that it wouldn't hurt the systems
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finances it wouldn't help the systems finances but we do say at the end of the
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paper that to the extent that people really prefer lump sums that it might be possible to get them to delay claiming
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and work longer for a little bit less than the actual fair amount which would actually save the system money I see and
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if um were you able to Project based on your survey or other data or knowledge um how much less you could offer and how
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it might benefit the system or is that the subject of the follow-up study the follow-up study we intend to do would
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try to vary the amounts that we can offer people um not necessarily making it a better deal because the system
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can't afford that but trying to evaluate whether people might take the lump some
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benefit if it were slightly reduced and my sense is it will in fact be popular okay so if I understand it correctly
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then where where your study is at now is you're finding a new way to do it it
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doesn't necessarily save Social Security from the deficits that everyone's
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talking about but it could be it could be changed in a way so that it it could have a positive effect on funding is it
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is it possible that it could make up that whole Gap do you think the Social Security shortfall is enormous uh the
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actuaries have estimated that it's on the order of $28 trillion uh in present value that's
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twice the size of the GDP of the US so a small delay in claiming will not solve the problem I think we're also going to
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have to have changes in the benefit formula we're going to have to have changes in the retirement ages but given
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that there need to be there needs to be a number of different tweaks or adjustments this could easily be one to
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make it more palatable to people that is we're not taking away anything from them
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we're giving them options and I hope that's more appealing than saying You
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must work another five years so it's their choice so what will you look at next well so we are looking further at
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uh alternative uh ways to get people to delay claiming and work longer there is some interesting research that's being
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done now showing that delayed retirement is actually better for you it's better
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for you mentally you stay networked with your peers it's better for you physically people that work longer are
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healthier and it's also better for a society in that if you encourage continued work you don't have to raise
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taxes so much on the young to be able to support the elderly so for a number of different reasons I'm very much in favor
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of delayed retirement not everyone will be able to do it but to the extent you can let's encourage it okay well please
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come back and tell us uh the results of the next phase thank you [Music]