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